ELEMENTARY 
ECONOMICS 


CARVER 


LIBRARY 

THE  UNIVERSITY 
OF  CALIFORNIA 

SANTA  BARBARA 


PRESENTED  BY 

MR.    KEN  TATUM 


c_--<ja---w.^->-'tiSi-/ 


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U' 


Digitized  by  tine  Internet  Arciiive 

in  2007  with  funding  from 

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littp://www.arcliive.or'g/details/elementaryeconomOOcarviala 


THE  EPHEBIC  OATH 

I  WILL  NOT  BRING  DISHONOR  UPON 
MY  ARMS,  AND  I  WILL  NOT  DESERT 
THE  COMRADE  BY  MY  SIDE.  I  WILL 
DEFEND  THE  SACRED  PLACES  AND 
ALL  THINGS  HOLY,  WHETHER  ALONE 
OR  WITH  THE  HELP  OF  MANY.  I 
WILL  LEAVE  MY  NATIVE  LAND  NOT 
LESS,  BUT  GREATER  AND  BETTER, 
THAN  I  FOUND  IT.  I  WILL  RENDER 
INTELLIGENT  OBEDIENCE  TO  MY 
SUPERIORS,  AND  WILL  OBEY  THE  ES- 
TABLISHED ORDINANCES  AND  WHAT- 
SOEVER OTHER  LAWS  THE  PEOPLE 
SHALL  HARMONIOUSLY  ESTABLISH. 
I  WILL  NOT  SUFFER  THE  LAWS  TO  BE 
SET  ASIDE  OR  DISOBEYED,  BUT  WILL 
DEFEND  THEM  ALONE  OR  WITH  THE 
HELP  OF  ALL.  AND  I  WILL  RESPECT 
THE  MEMORY  OF  THE  FATHERS. 
THE    GODS    BE    MY   WITNESSES 


The  young  men  of  Athens  took  this  oath  to  the 

Commonwealth  at  the  beginning  of  their  second 

year  of  military  service 


ELEMENTARY  ECONOMICS 


BY 


THOMAS  NIXON  CARVER 

PROFESSOR   OF   POLITICAL   ECONOMY,   HARVARD   UNIVERSITY 


GINN  AND  COMPANY 

BOSTON     •    NEW   YORK    •    CHICAGO    •    LONDON 
ATLANTA    •    DALLAS     •    COLUMBUS    •    SAN   FRANCISCO 


COPYRIGHT,  1920,  BY  THOMAS  NIXON  CARVER 

ENTERED  AT  STATIONERS*  HALL 

ALL  RIGHTS  RESERVED 

832.7 


Vht  jgtbengum  3gttg< 

GINN  AND  COMPANY  •  PRO- 
PRIETORS •  BOSTON  •  U.S.A. 


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SANTA  BARBARA 


INTRODUCTION 


There  never  was  a  time  when  men  needed  to  think  so  seriously 
about  the  problems  of  national  welfare  as  the  present.  It  is  plainer 
than  ever  that  this  is  an  economic  question,  that  is,  a  question  of 
economizing.  It  is  the  purpose  of  this  book  to  examine  the 
economic  foundations  of  our  national  welfare  and  to  point  out 
some  of  the  simpler  and  more  direct  methods  of  strengthening 
these  foundations,  to  the  end  that  our  nation  and  all  nations  that 
aim  at  democracy  and  justice  may  prosper  more  and  more. 

In  order  that  there  may  be  real  improvement  our  people  must 
themselves  understand  the  principles  upon  which  national  pros- 
perity rests.  People  who  do  not  govern  themselves,  but  rely  upon 
rulers  to  govern  them,  may  ignore  these  questions  ;  but  people  who 
rule  themselves  have  no  one  to  depend  upon  but  themselves.  They 
must  therefore  know  for  themselves  the  leading  principles  of  this 
great  subject. 

The  time  to  begin  studying  this  subject  in  a  systematic  manner 
is  when  we  first  begin  to  think  about  public  questions — that  is,  in 
early  youth,  for  our  youth  are  thinking  about  public  questions  and 
we  could  not  stop  them  even  if  we  wanted  to.  Much  time  is  lost 
and  much  loose  thinking  results  from  postponing  this  study  too 
long.  Opinions  are  formed  too  hastily  and  with  too  little  informa- 
tion, and  when  once  formed  they  are  hard  to  get  rid  of.  No  study 
can  possibly  be  more  important  than  that  which  will  even  slightly 
reduce  the  number  of  hasty  and  ill-founded  opinions  and  train 
our  future  citizens  in  the  habit  of  careful,  painstaking  study  of 
public  questions  and  of  looking  on  many  sides  of  each  one  before 
reaching  a  conclusion  concerning  it. 


CONTENTS 

PART  ONE.    WHAT  MAKES  A  NATION  PROSPEROUS 

CHAPTER  PAGE 

I.   What  makes  a  Nation  Prosperous 3 

II.   Wealth  and  Well-Being 8 

III.  The  Geographical  Situation 16 

IV.  The  Quality  of  the  People 28 

V.    Competition 39 

VI.    Cooperation 45 

VII.    Law  and  Government 51 

VIII.   Morals  and  Religion 63 

PART  TWO.    ECONOMIZING  LABOR 

IX.   The  Division  of  Labor 75 

X.    Power 83 

XI.    Capital 91 

XII.   The  Organization  of  Business 100 

XIII.  The  Economical  Use  of  Labor  on  Land    .     .     .     .  iii 

XIV.  Keeping  a  Proper  Balance  among  the  Factors  of 

Production 117 

PART  THREE.    THE  PRODUCTIVE  ACTIVITIES 

XV.   Ways  of  getting  a  Living 125 

XVI.   The  Extractive  Industries 132 

XVII.   The  Genetic  Industries 143 

XVIII.   The  M.\nufacturing  Industries 159 

XIX.   Transportation 170 

XX.    Merchandising  and  the  Professions 182 

vii 


viii  CONTENTS 

PART  FOUR.   EXCHANGE 

CHAPTER  PAGE 

XXI.   Value:  its  Meaning 193 

XXII.   Value:  its  Cause  and  Quantity 199 

XXIII.  Scarcity 206 

XXIV.  Money 215 

XXV.   Banking 223 

XXVI.    Commercial  Crises 235 

XXVII.    International  Trade 244 

PART  FIVE.    DIVIDING  THE  PRODUCT  OF  INDUSTRY 

XXVIII.   The  Bargaining  Process 253 

XXIX.   The  Law  of  V^ariable  Proportions 257 

XXX.   The  General  Nature  of  the  Wage  Question    .  261 

XXXI.   What  determines  the  Rate  of  Wages  ....  266 

XXXII.   The  Organization  of  Laborers 276 

XXXIII.  The  Rent  of  Land 283 

XXXIV.  Interest  and  the  Demand  for  Capital      .     .     .  290 
XXXV.   Interest  and  the  Supply  of  Capital     ....  296 

XXXVI.    Profits 301 

XXXV-'II.   The  Government's  Share 306 

PART  SIX.   THE  CONSUMPTION  OF  WEALTH 

X.X.XVIII.   Meaning  AND  Importance  of  C0NSU.MPT10N .     .     .  319 

XXXIX.   Rational  Consumption 325 

XL.   Luxury 332 

XLI.   The  Control  of  Consumption 340 

XLII.   The  Battle  of  the  Standards 346 

PART  SEVEN.    REFORM 

XLIII.    C0M.MUNIS.M 353 

XLIV.    Socialis.m 363 

XLV.   The  Single  Tax 372 

XLVI.   Anarchism 380 

XLVII.   Constructive  Liberalism 388 

SUGGESTIONS  FOR  ADDITIONAL  READINGS     .     .     .     .     .  398 

INDEX 405 


ELEMENTARY  ECONOMICS 

PART  ONE.    WHAT  MAKES  A  NATION 
PROSPEROUS 


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CHAPTER  I 
WHAT  MAKES  A  NATION  PROSPEROUS 

Production  and  economy  the  basis  of  prosperity.  A  nation 
prospers  on  what  it  produces.  It  can  continue  to  prosper  only  so 
long  and  in  so  far  as  it  continues  to  produce,  year  in  and  year 
out,  century  after  century  and  millennium  after  millennium.  Pro- 
duction, however,  is  not  enough, — the  nation  must  also  economize. 
In  fact,  production  itself  is  a  form  of  economy. 

However  much  the  nation  produces,  it  prospers  only  in  so  far 
as  it  continues  to  produce,  year  by  year,  more  than  it  con- 
sumes and  wears  out.  When  every  year  sees  something  added 
to  the  stock  of  durable  goods,  something  additional  produced  for 
future  years,  there  is  an  expansion  and  an  accumulation  of 
wealth ;  in  short,  there  is  prosperity.  If  at  any  time  a  nation 
begins  consuming  in  a  year  all  that  it  produces  that  year,  the 
accumulations  of  the  past  quickly  deteriorate  and  disappear, 
prosperity  is  gone,  and  poverty  lies  ahead. 

Two  primary  factors  in  production.  How  much  a  nation  can 
produce  will  depend  primarily  upon  two  things :  first,  upon  its 
geographical  situation,  that  is,  upon  how  rich  its  land  is  in  plant 
food;  minerals^  forests  and  power,  how  favorable  its  climate  is, 
and  how  well  it  is  situated  for  trade  and  transportation ;  second, 
upon  its  people,  that  is,  upon  how  energetic  and  how  wise  they 
are"1irmaking lise  of  their  natural  resources. 

A  nation's  geographical  situation  is  not  easily  changed ;  but  the 
habits  of  the  people  may  be  changed,  and  these  are  even  more 
important  than  the  geographical  situation.  By  reason  of  their 
energy  and  wisdom,  nations  have  grown  rich  and  great  in  the  midst 
of  very  poor  geographical  surroundings.  Others  have  grown  poor 
in  the  midst  of  rich  surroundings  by  reason  of  their  lack  of  energy 
or  their  unwisdom.    A  nation  can  therefore  control  the  factor 


4  ELEMENTARY  ECONOMICS 

upon  which  its  prosperity  most  depends  ;  which  means  that  it  can, 
in  most  cases,  be  as  prosperous  as  it  deserves  to  be,  or  that  it  must 
blame  itself  and  not  its  geography  if  it  does  not  prosper. 

How  to  secure  a  full  and  wise  use  of  the  national  energy,  where 
millions  of  individual  wills  have  to  be  persuaded  and  wisely  di- 
rected, is  one  of  the  greatest  and  most  important  of  all  questions. 
The  working  energy  of,  say,  a  hundred  million  people  is  tremen- 
dous, but  the  opportunities  for  waste  are  also  tremendous.  Upon 
the  wise  utilization,  on  the  one  hand,  or  the  waste,  on  the  other, 
of  that  vast  fund  of  energy  hangs  the  question  of  the  prosperity 
or  the  poverty  of  the  nation. 

Hard  work  is,  of  course,  necessary,  but  mere  hard  work  is  not 
enough.  The  work  must  be  wisely  directed.  This  requires  a  vast 
fund  of  knowledge — scientific,  political,  and  administrative.  It 
also  requires  organization,  in  order  that  each  individual  may  do 
that  for  which  he  is  best  fitted  and  also  in  order  that  different  in- 
dividuals may  work  with,  rather  than  against,  one  another. 

Importance  of  economy.  The  word  "economy,"  in  its  widest 
sense,  includes  the  using  of  all  the  energ)'-  of  the  people  and  the 
wise  direction  of  that  energy.  For  any  person  to  be  lazy  or  idle 
is  a  waste  of  that  person's  energy  and  is  therefore  uneconomical. 
To  direct  that  energy  unwisely  is  to  waste  it  in  another  way  and 
is  also  uneconomical.  Both  forms  of  waste  prevent  the  highest 
prosperity  of  the  nation. 

What  it  means  to  economize.  In  its  simplest  possible  sense, 
to  economize  is  to  choose  among  several  different  things  that  one 
would  like  to  have,  giving  up  the  less  important  in  order  to  have 
the  more  important.  This  choosing  takes  on  many  forms.  One 
may  have  to  choose  between  play  and  work,  between  different 
kinds  of  work  or  different  kinds  of  play,  or  between  different 
objects  which  one  might  get  for  one's  work  or  one's  money. 

When  you  are  asked  to  do  a  certain  thing  and  you  say  that  you 
have  not  time,  you  may  be  saying  in  a  more  polite  way  that 
there  is  something  else  which  you  consider  more  important  than 
the  thing  you  are  asked  to  do.  You  are  compelled  to  economize 
your  time,  since  you  have  not  time  enough  to  do  everything.    You 


WHAT  ^lAKES  A  NATION  PROSPEROUS  5 

must  leave  many  things  undone,  and  it  is  necessary,  therefore,  that 
you  choose  very  carefully  the  few  things  which  you  think  it  most 
important  that  you  should  do  with  your  limited  time  and  energy. 
Similarly,  when  you  say  that  you  cannot  afford  a  certain  thing, 
you  frequently  mean  that  there  are  other  things  for  which  you 
think  it  more  important  that  you  spend  your  money.  Not  having 
money  enough  to  buy  everything,  you  must  choose  very  carefully 
and  try  to  get  the  few  things  which  will  be  worth  most  to  you  in 
the  long  run.  To  do  otherwise  either  with  your  time  or  your  money 
would  be  to  fail  to  achieve  the  largest  prosperity  or  well-being. 
This  is  as  true  of  a  nation  as  of  an  individual. 

Why  we  have  to  economize.  When  you  say  that  you  do  not 
have  time  to  do  a  certain  thing  or  that  you  cannot  afford  to  buy 
a  certain  object,  you  are  stating  two  of  the  fundamental  facts  of 
life :  first,  the  ever-present  fact  of  scarcity ;  second,  that  you  are 
an  economic  being,  capable  of  recognizing  the  fact  of  scarcity  and 
of  guiding  yourself  accordingly.  It  is  the  fact  of  scarcity  that 
makes  it  necessary  for  us  to  economize,  and  it  is  our  wisdom 
that  enables  us  to  meet  the  situation  and  conform  our  lives  to 
it.  The  fact  that  our  time  and  energy  are  scarce  or  insufficient 
to  enable  us  to  do  everything  that  we  should  like  to  do  makes  it 
certain  that  we  cannot  produce  or  earn  everything  that  we  should 
like  to  have.  Besides,  if  we  were  to  work  all  the  time  we  should 
have  no  time  to  play;  and  everybody  likes  to  play — that  is, 
everybody  worth  mentioning.  One  of  our  many  problems  of 
economy  is  therefore  that  of  choosing  whether  to  deprive  ourselves 
of  the  opportunity  to  play  in  order  to  get  certain  goods  that  we 
want,  or  to  do  without  the  goods  in  order  to  have  time  to  play 
as  much  as  we  should  like. 

At  every  step  in  the  life  of  every  normal  person  he  is  confronted 
with  some  problem  of  economy,  and  the  necessity  for  economy 
grows  out  of  the  scarcity  of  something  or  other.  We  never  think 
of  economizing  things  that  are  sufficiently  abundant  to  satisfy 
everybody,  such  as  air,  sunlight,  water  in  many  places,  wood, 
stone,  or  sand  in  others.  Let  any  of  these  things  become  scarce, 
however,  and  we  must  begin  to  economize  them. 


6  ELEMENTARY  ECONOMICS 

It  happens  that  in  the  spots  where  most  of  us  live  many  desir- 
able objects  are  scarce.  These  objects  must  be  increased — and 
that  requires  an  economical  use  of  our  time  and  energy — or  they 
must  be  economized  and  made  to  go  as  far  as  possible  in  the 
satisfaction  of  our  wants.  Show  me  a  person  who  experiences  no 
lack  or  scarcity  of  anything  and  I  will  show  you  a  person  who  has 
no  need  for  economy ;  but  you  will  look  a  long  time  before  you 
find  him.  Show  me  a  creature  who  does  not  appreciate  the  fact 
of  scarcity  and  I  will  show  you  a  creature  who  does  not  know 
enough  to  economize,  however  much  he  may  need  to. 

Getting  and  utilizing.  In  the  practical  everyday  life  of  the 
average  person  of  the  present,  the  problems  of  economy  come 
mainly  under  the  heads  of  getting  and  utilizing,  of  income  and 
expenditure,  or  of  business  and  household  management.  A  person's 
common  experience  of  scarcity  takes  the  form  of  an  income  which 
will  not  buy  all  the  things  he  desires  or,  which  means  the  same 
thing,  of  desires  which  run  beyond  his  income. 

Three  ways  of  economizing.  One  must,  therefore,  because  of 
scarcity,  economize,  first,  by  using  his  time  and  energy  to  better 
advantage  in  order  to  get  a  larger  income ;  second,  by  spending 
his  income  as  wisely  as  possible  so  as  to  buy  the  things  he  needs 
most;  third,  by  economizing  the  goods  purchased  so  as  to  make 
them  go  as  far  as  they  will.  IMost  men  have  to  economize  in  all 
these  ways.  The  greater  part  of  the  time  and  attention  of  all 
civilized  men  is  spent  on  these  matters  of  economy,  which  is  one 
reason  why  the  study  of  economics  is  the  most  important  of  all 
studies.  Whether  they  prosper  or  not  depends  upon  how  well  they 
solve  these  problems. 

A  glance  at  the  diagram  at  the  beginning  of  this  chapter  will 
give  one  a  general  view  of  all  the  forms  in  which  the  problems  of 
getting  and  utilizing  present  themselves.  This  also  gives  in  out- 
line the  leading  branches  of  the  great  science  of  economics,  which 
has  to  do  with  the  problems  of  getting  and  utilizing  things  that 
are  scarce.  It  has  nothing  to  do  with  things  that  are  not  scarce 
and  therefore  do  not  have  to  be  economized.  When  a  thing  is 
scarce,  it  leaves  some  of  our  wants  unsatisfied.    If  we  can  produce 


WHAT  MAKES  A  NATION  PROSPEROUS  7 

or  economize  it,  it  leaves  fewer  wants  unsatisfied  and  leaves  us 
better  off.    That  is  the  way  we  increase  our  prosperity. 

Production,  itself,  is  a  form  of  economy.  It  requires,  first,  that 
we  utilize  our  working  power  and  not  let  it  lie  idle ;  second,  that 
we  utilize  it  wisely,  doing  the  most  important  things  and  leaving 
the  less  important  things  undone ;  third,  that  we  do  what  we 
undertake  in  the  most  efficient  way,  with  the  least  waste  of  effort. 
After  goods  are  produced,  their  wise  use  is  another  form  of 
economy.  Economy,  in  this  wide  sense,  is  the  basis  of  all 
prosperity. 

EXERCISES  ^^>^,.:i^!^" 

1.  What  are  the  two  principal  things  upon  which  the  prosperity  of       / 
a  nation  depends?    Which  is  the  more  important?    Why?,     b^-'^'Si^ 

2.  Why  is  economy  so  important  ?  U^p^*^        {Zj^^H  -^^d"^*^ 

3.  What  does  it  mean  to  economize  ?-  W  t^-'''''J^^^';:;J^3?^  ^-^^ 

4.  Why  do  we  have  to  economize?     -^-'-»-»^  j-v  ^^a..*.-T*</<^    /->--^  ^^ 

5.  In  what  three  ways  does  the  average  man  economize?       ' 

6.  Why  is  it  more  important  that  we  give  attention  to  things  that 
are  scarce  than  to  things  that  are  sufl&cient? 


CHAPTER  II 
WEALTH  AND  WELL-BEING 

Prosperity  and  wealth.  The  study  of  national  prosperity 
must  necessarily  lead  to  a  study  of  such  things  as  wealth  and 
well-being.  Prosperity  consists  in  getting  an  adequate  supply  of 
those  things  called  wealth  and  in  utilizing  them  wisely.  When  we 
have  secured  an  adequate  supply  of  those  things  we  have  the 
means  of  well-being.  When  we  have  utilized  them  wisely  we  have 
achieved  well-being.  The  material  objects  which  we  try  to  get 
and  to  utilize  are  called  wealth. 

What  are  economic  goods  ?  Before  we  cantgo  very  far  in  our 
study  of  getting  and  utilizing,  or  of  production  and  consumption, 
we  must  get  a  clear  idea  of  the  sort  of  things  that  men  try  to  pro- 
duce or  to  get.  When  it  was  stated  in  the  last  chapter  that  the 
necessity  for  economy  arose  out  of  the  fact  of  scarcity,  it  might 
have  been  guessed  at  once  that  scarcity  has  a  great  deal  to  do 
with  our  concept  of  wealth  and  with  our  efforts  to  produce  it. 
At  any  rate  the  only  things  we  try  to  produce  are  the  things  of 
which  we  do  not  have  enough.  These  are  the  things  about  which 
we  are  anxious.  The  very  first  step  toward  a  true  understanding 
of  the  nature  of  wealth,  then,  is  a  clear  perception  that  wealth,  in 
the  economic  sense,  consists  of  things  that  are  scarce  and  therefore 
need  to  be  economized.  Some  very  useful  things  are  very  abund- 
ant, however, — so  abundant  that  everyone  can  have  all  he  wants. 
Such  things  do  not  have  to  be  economized,  hence  they  are  not 
economic  goods.  Only  those  things  are  economic  goods  which 
have  to  be  economized ;  that  is,  which  are  scarce. 

Two  meanings  of  wealth.  Now  the  word  "wealth"  has  two 
meanings.  In  the  first  place,  it  is  the  collective  name  for  all 
economic  goods,  or  for  all  goods  that  have  to  be  economized ;  that 

8 


WEALTH  AND  WELL-BEING  9 

is,  for  goods  that  are  scarce.  In  the  second  place,  it  is  the  name 
of  a  condition  or  state  of  being.  It  comes  from  the  older  word 
"weal,"  which  means  ver>'  much  the  same  as  "well-being." 
These  two  meanings,  while  apparently  different,  are  yet  very 
closely  related.  The  condition  of  well-being  which  we  call  wealth 
in  the  latter  sense  depends  upon  the  possession  of  an  adequate 
supply  of  those  things  which  we  call  wealth  in  the  former  sense ; 
that  is,  of  the  things  which  are  ordinarily  scarce.  He  who  lacks 
an  adequate  supply  of  these  things  is  poor,  though  of  air,  sunshine, 
and  other  things  which  are  not  scarce  he  has  as  much  as  any- 
body. He  who  possesses  an  adequate  supply  of  scarce  things  is 
wealthy,  or  in  a  state  of  wealth.  In  short,  those  economic  goods 
called  wealth  are  the  goods  upon  which  weal,  or  well-being,  de- 
pends. Well-being  is  increased  when  these  goods  are  increased 
or  economized ;  well-being  is  decreased  when  these  goods  are 
decreased  or  wasted. 

How  well-being  depends  upon  wealth.  It  could  not  be  said 
of  anything  which  is  not  scarce  that  our  well-being  increases 
when  we  have  more  of  it  and  decreases  when  we  have  less  of  it. 
There  is  such  an  abundance  of  air,  for  example,  under  ordinary 
circumstances,  that  no  one  would  be  any  better  off  than  he  is 
now  if  the  supply  of  air  could  be  increased,  nor  would  anyone 
be  any  worse  off  if  the  supply  of  air  were  slightly  decreased. 
In  other  words,  no  one's  well-being  depends  upon  more  air,  even 
if  it  could  be  produced.  If,  however,  air  were  so  scarce  that 
there  was  not  enough  to  go  around,  then  not  only  would  it 
need  to  be  economized  very  carefully  but  there  would  be  some 
advantage  in  producing  more  of  it,  if  that  could  be  done.  The 
weal,  or  well-being,  of  mankind  would  be  improved  in  propor- 
tion as  more  air  could  be  produced  ;  mankind  would  be  injured 
in  proportion  as  air  was  wasted  or  destroyed.  While,  there- 
fore, we  can  say  that  air  is  a  necessity  in  a  certain  absolute 
sense,  yet  in  a  practical  economic  sense  we  cannot  say  that  anyone 
would  be  better  oft'  if  more  air  were  produced  or  if  it  were  even 
wisely  economized  ;  nor  can  we  say  that  anyone  would  be  worse  off 
if  a  little  air  were  destroyed  or  wasted.    There  would  still  be 


ELEMENTARY  ECONOMICS 

enough  to  satisfy  everybody.  That  is  why  air,  though  an  abso- 
lute necessity,  is  not  an  economic  good. 

The  question  of  having  more  or  having  less.  Water  is  an- 
other illustration ;  perhaps  a  better  one,  because  there  are  many 
places  where  water  is  so  abundant  that  it  does  not  have  to  be 
economized  at  all  and  other  places,  such  as  the  arid  West,  where 
it  is  so  scarce  that  it  has  to  be  economized  very  carefully.  In  the 
former  places  water  is  not  wealth ;  in  the  latter  it  is.  In  the 
former  no  one  labors  to  secure  any  more ;  in  the  latter  they  do. 
In  the  former  no  one  would  be  better  off  if  there  were  more  water  ; 
in  the  latter  some  people  would  be  better  off.  In  the  former  well- 
being  does  not  depend  upon  a  little  more  or  a  little  less  water  ; 
in  the  latter  it  does.  In  the  former  there  is  no  occasion  for 
economizing  water ;  in  the  latter  it  is  very  important  that  it  be 
economized  and  made  to  go  as  far  as  possible.  In  the  former  the 
formula  "more  water,  greater  well-being;  less  water,  less  well- 
being  "  is  not  true  ;  in  the  latter  it  is  true.  This  is  the  test  in  every 
time  and  place  as  to  whether  water  is  wealth  or  not.  All  that  has 
been  said  of  water  may  be  said  of  anything  else.  The  same  test 
must  be  applied  to  determine  whether  it  is  wealth  or  not. 

In  the  diagram  given  below  is  a  classification  of  all  tangible  ob- 
jects with  which  it  would  be  possible  for  man  to  concern  himself. 


Tangible 
Objects 


mu-    ..     r  ,„T„,r„^  r  Things  harmful  to  man 

Objectsofrepugnance("Illth")<  *' 

L  Thingsusef  ul  but  too  abundant 

^,  .  -  .    ,.„  f  Things  useless  but  not  harmful 

Objects  of  mdifterence  ^  _,  .  .  , ,  „  . 

L  Thmgs  useful  but  suiiicient  m  quantity 

I  Objects  of  desire  (Wealth) :  Things  useful  afid  scarce 


Those  which  are  harmful  to  him  he  must  try  to  destroy.  To- 
ward those  which  are  useless  without  being  in  the  way  or  being 
otherwise  harmful  he  is  indifferent.  Those  which  are  useful  to 
him,  called  goods,  concern  him  most.  Of  these,  some  are  too 
abundant  at  certain  times  and  places.  In  such  times  and  places 
his  attitude  toward  them  must  be  very  much  the  same  as  that 
toward  those  which  are  positively  harmful.  Yet  when  they  exist 
in  smaller  quantities — that  is,  in  quantities  less  than  he  needs — 


WHERE    WATER    IS    WEALTH 
A  primitive  device  for  pumping  irrigation  water  from  the  Nile 


12  ELEMENTARY  ECONOMICS 

he  will  strive  as  hard  to  get  more  as  he  will  strive  to  reduce  the 
supply  when  they  are  too  abundant.  Water  in  swampy  land  is 
an  example  of  overabundance ;  in  desert  land,  of  underabundance. 
Manure  in  a  city  livery  stable  is  an  equally  good  example  of  over- 
abundance ;  in  a  sterile  field,  of  underabundance. 

Relation  of  value  to  economic  goods.  We  have  gone  to  con- 
siderable pains  to  point  out  that  one  characteristic  of  economic 
goods  is  that  they  are  always  scarce.  It  is  this  which  gives  them 
the  power  to  induce  men  to  work  and  to  economize.  Another  char- 
acteristic is  that  they  all  have  value,  or  power  in  exchange.  The 
power  to  command  other  desirable  things  in  peaceful  and  voluntary 
exchange — that  is,  value — is  very  much  the  same  as  the  power  to 
induce  men  to  work.  That  is  to  say,  the  thing  which  possesses  one 
kind  of  power  will  always  possess  the  other,  if,  indeed,  it  be  not 
incorrect  to  speak  of  them  as  different  kinds  of  power.  The  object 
which  possesses  this  power  to  appeal  to  human  motives  in  such  a 
way  as  to  induce  men  either  to  give  up  some  desirable  object  in  ex- 
change for  it  or  to  labor  in  order  to  produce  it  is  always  said  to 
be  valuable.  This  power  depends  in  all  cases  upon  the  scarcity  or 
insufficiency  of  the  existing  supply  of  the  object  in  question. 

These  things,  again,  are  economic  goods,  or  wealth.  Since,  as 
we  have  just  shown,  they  all  possess  value,  it  amounts  to  the  same 
thing  to  say  that  wealth  consists  of  things  that  have  value.  In 
short,  such  words  as  "wealth,"  "value,"  "economic  goods,"  and 
"economy"  all  center  around  the  one  great  fact  of  scarcity, — 
the  insufficiency  of  certain  things  at  certain  times  and  places  to 
satisfy  desires.  Out  of  this  great  fact  grow  also  such  ideas  as 
property,  industry,  and  foresight.  No  one  wants  to  secure  prop- 
erty rights,  for  example,  in  anything  of  which  everybody  has 
enough.  But  when  anyone  fears  that  there  may  not  be  enough 
of  a  certain  thing  to  go  around,  and  that  he  may,  therefore,  be 
left  out,  he  naturally  wants  to  guard  against  that  calamity  by 
getting  possession  of  a  supply.  He  will  try  to  get  possession  of 
a  supply  either  by  producing  it  himself  or  by  buying  it  of  someone 
else,  and  he  will  try  to  guard  his  treasure  carefully.  When  the 
state  steps  in  and  undertakes  to  protect  him  in  his  possession,  he 


WEALTH  AND  WELL-BEING  13 

has  then  secured  a  property  right  in  the  thing  in  question.  Again, 
productive  industry,  as  already  shown,  is  directed  toward  lessening 
scarcity,  or  increasing  the  supply  of  something  whose  supply 
would  otherwise  be  insufficient.  Frugality  and  foresight  are  exer- 
cised to  provide  against  further  scarcity. 

Meaning  of  scarcity.  A  thing  is  scarce  when  there  is  not-as 
much  as  people  want.  A  thing  may  be  rare  without  being  scarce 
and  scarce  without  being  rare.  Flies  are  rare  in  winter  time  in 
cold  countries,  but  they  cannot  properly  be  said  to  be  scarce 
because  no  one  wants  any  more.  Grass  cannot  be  said  to  be  rare 
in  summer  time,  but  if  there  is  not  enough  for  the  farmer's  cattle, 
the  farmer  at  least  will  want  more.  In  that  sense  grass  is  scarce, 
even  in  summer. 

Scarcity  a  matter  of  time  and  place.  A  thing  is  scarce,  if 
at  all,  in  some  _definite--time^jjid_place.  No  matter  how  much 
water  thereTnay  be  in  the  Mississippi  River,  it  does  not  alter  the 
fact  that  water  is  scarce  a  few  hundred  miles  to  the  westward ; 
no  matter  how  much  copper  there  may  be  in  the  bowels  of  the 
earth,  it  does  not  alter  the  fact  that  there  is  less  copper  in  avail- 
able form  than  is  needed  on  the  surface.  It  is  this  fact  which 
induces  men  to  labor  to  move  things  from  one  place  to  another. 

Before  proceeding  farther  it  is  necessary  to  make  one  important 
qualification — men  do  not  always  know  what  they^eally  needLor_ 
upon  what  their  well-being  depends.  If  they  are  mistaken  on 
any  phase  of  this  question,  they  will  be  placing  a  high  value 
upon  some  things  that  are  not  good  for  them  and  a  low  value 
or  no  value  at  all  upon  some  things  that  are  good  for  them. 
They  are  poor  economizers  who  do  this,  but  there  are  many  poor 
economizers  in  the  world.  If  they  think  they  need  more  than  they 
have,  they  will  strive  to  get  more,  either  by  offering  something  for 
it,  thus  giving  it  a  market  value,  or  by  trying  to  produce  it, 
thus  creating  an  industry.  This  explains  why  it  is  that  the  student 
of  economics  is  sometimes  compelled  to  include  among  economic 
goods,  or  wealth,  articles  which  he  himself  would  not  use  or 
which  he  regards  as  harmful,  such  as  opium,  alcoholic  drinks,  or 
tobacco. 


14  ELEMENTARY  ECONOMICS 

Importance  of  desiring  the  right  things.  It  sometimes  hap- 
pens that  men  desire  things  which  they  do  not  need  and  need 
things  which  they  do  not  desire.  In  such  cases  they  will  try 
to  get  or  produce  what  they  desire  rather  than  what  they  need. 
The  industries  will  be  organized  to  produce  the  things  which  the 
people  desire.  If  they  desire  opium  or  vodka  they  will  produce 
these  things  rather  than  things  that  will  do  them  more  good. 
In  such  cases  the  more  efficient  their  system  of  production  be- 
comes the  more  harm  they  will  do  themselves  ;  and  an  efficient 
industrial  system  promotes  national  deterioration  rather  than 
national  well-being.  If  one  were  to  make  a  study  of  the  wreckage 
of  nations,  one  would  probably  find  that  more  had  decayed  because 
their  wants  were  wrong  than  because  they  were  not  able  to  supply 
their  wants.  Teaching  or  persuading  people  to  want  the  right 
things  has  commonly  been  regarded  as  the  work  of  the  educator 
and  the  preacher,  but  no  one  who  really  has  at  heart  the  welfare  of 
the  people  can  be  indifferent  to  the  quality  of  their  wants  or 
desires. 

Necessity  of  economizing  means  of  production.  Thus  far  in 
discussing  the  necessity  for  economy  we  have  been  considering  the 
means  of  satisfying  our  wants  directly.  But  we  must  also  consider 
the  necessity  of  economizing  the  indirect  means  of  satisfying 
wants.  In  the  effort  to  produce  goods  to  satisfy  our  wants  it 
is  necessary  to  make  use  of  various  factors  of  production,  such 
as  labor,  tools,  raw  materials,  etc.  These  do  not  themselves  satisfy 
our  wants,  but  they  enable  us  to  produce  things  that  do  satisfy. 
They  also  are  scarce  and  have  to  be  economized. 

To  be  sure,  many  things  that  are  essential  to  production  are 
not  scarce.  These  are  not  considered  as  factors  of  production ; 
that  is,  they  are  not  economic  factors  of  production  at  all.  Carbon 
dioxide  is  just  as  essential  to  the  growing  of  plants  as  nitrogen, 
phosphorus,  or  potash,  but  there  is  plenty  of  carbon  dioxide  in  the 
air ;  whereas,  in  most  soils,  nitrogen,  phosphorus,  and  potash  are 
scarce  or  tending  to  become  scarce.  Therefore  these  three  sub- 
stances are  considered  as  factors — that  is,  economic  factors — 
in  plant  growth.   Applying  the  same  formula  here  as  we  did  to 


WEALTH  AND  WELL-BEING  15 

other  things  earlier  in  this  discussion,  the  average  farmer  can  say, 
and  say  truly,  ''  More  nitrogen,  more  plant  growth ;  less  nitrogen, 
less  plant  growth."  Therefore  agricultural  production  is  increased 
by  increasing  the  nitrogen  in  the  soil.  The  same  may  be  said  of 
phosphorus  and  potash,  but  the  formula  does  not  apply  to  carbon 
dioxide.  This  is  a  principle  of  the  very  greatest  importance,  as 
will  be  seen  later.  Some  of  the  greatest  problems  in  economics 
and  social  justice  depend  upon  this  formula  and  are  incapable  of 
solution  without  it. 

Why  a  thing  has  value.  The  fact  that  desirability  and  scar- 
city, and  these  alone,  give  value  to  a  thing  is  perhaps  clearly 
enough  established  by  this  time.  Few  will  care  to  question  the 
statement  that  not  only  must  men  desire  a  thing  but  they  must 
desire  more  than  they  have  before  they  will  strive  to  get  more 
either  by  purchasing  it  or  by  producing  it.  Moreover,  this  is  as 
true  of  a  factor  used  in  production,  such  as  tools,  as  of  an  article  of 
direct  consumption,  such  as  bread.  It  may  not  be  quite  so  obvious, 
but  it  is  none  the  less  true,  that  this  is  also  one  of  the  great 
sources  of  that  conflict  of  human  interests  which  gives  rise  to 
most  of  our  problems  of  justice  and  equity. 

EXERCISES 

1.  What  are  economic  goods?  'Lw*  -  / 

2.  In  what  two  senses  is  the  word  "wealth"  used?^ 

3.  In  what  sense  does  well-being  depend  upon  economic  goods 
as  distinguished  from^  ^-^^^^S^.  that^are  abundant  enough  to  satisfy 
everybody?  J' ""^  1^ v  ^ /«^*«^5^*W^  ^    ^^       "^  ^ 

4.  Of  what  class  or  goods  can  you  say  that  you  are  better  off  zs 
you  get  more  of  them  and  worse  off  if  }'ou  have  less  of  them  ?    Can 

you  say  this  of  air  ?  of  water  ?    If  so,  under  what  conditions  ?   V^   ^S  ^*^^ 

5.  What  goods  have  value?    Why?-/   -^    i^;»t.  .-    .  ,',xSkt^^t*lf^ 

6.  What  do  you  mean  by  scarcity?    Is  it  the  same  as  rarity i*^/r     Vc**v/ 

7.  What  is  a  factor  of  production ?  Is  labor  a  factor  of  production^*-- 
Is  land  a  factor  of  production?     Could  your  neighborhood  produce 
more  goods  if  it  had  more  land?     Are  tools,  machines,  and  buildings 
factors  of  production  ?     Could  your  neighborhood  produce  more  goods 

if  it  had  more  tools,  machines,  and  buildings  ?    r^  ^ 

a 


CHAPTER  III 
THE  GEOGPIAPHICAL  SITUATION 

It  was  stated  near  the  beginning  of  Chapter  I  that  a  people 
must  generally  blame  itself  rather  than  its  geographical  situation 
if  it  does  not  prosper.  The  human  factor  is  more  important  than 
the  geographical  factor  in  determining  national  prosperity.  Never- 
theless the  geographical  factor  is  not  to  be  ignored.  However 
gifted,  energetic,  and  farsighted  a  race  may  be,  it  will  find  it 
easier  to  expand  and  become  prosperous  in  a  rich  than  in  a 
sterile  country.  In  view,  however,  of  the  wonderfully  rich  territory 
occupied  by  the  American  people,  it  is  obvious  that  they  cannot 
excuse  themselves  on  the  ground  of  limited  resources  if  they  do 
not  become  as  prosperous  and  as  great  a  people  as  they  would 
like  to  be.  Their  prosperity,  power,  and  greatness  are  limited 
mainly  by  their  own  energy,  wisdom,  and  virtue  rather  than  by 
their  environment. 

What  is  a  favorable  geographical  situation?  It  is  easy  to 
overemphasize  the  bodily  comfort  of  living  in  a  warm  as  opposed  to 
a  hot  or  cold  climate  and  to  ignore  the  bracing  effects  of  change- 
able weather.  It  is  also  easy  to  overemphasize  the  tremendous 
productivity  of  certain  tropical  regions  and  to  forget  that  they 
produce  the  enemies  as  well  as  the  friends  of  man  in  great  pro- 
fusion. It  is  equally  easy  to  go  too  far  in  the  opposite  direction 
and  to  hold  that  hard  conditions,  such  as  a  harsh  climate  and  a 
sterile  soil,  are  best  for  man's  development.  If  hard  conditions 
are  all  that  men  need,  the  Eskimos  of  the  Far  North  are  peculiarly 
blessed. 

If  we  take  everything  into  consideration,  it  is  probable  that  the 
temperate  zones  are  most  favorable  to  man's  development  as  well 
as  to  his  prosperity.    He  has  here  fewer  unconquerable  enemies 

i6 


THE  GEOGRAPHICAL  SITUATION  17 

than  in  the  tropics  or  in  the  frigid  zones.  He  finds  a  wider  variety 
of  useful  materials,  such  as  grass,  timber,  and  minerals,  and  he 
finds  them  in  greater  abundance  here  than  elsewhere.  Here  the 
advantages  to  be  gained  by  work  are  more  obvious  and  more 
easily  comprehended  by  the  average  intellect  than  anywhere  else. 
The  intelligence  required  to  see  the  advantage  of  building  shelters, 
making  clothing,  and  kindling  fires,  especially  in  a  place  where, 
along  with  the  cold  weather,  there  is  an  abundance  of  suitable 
material,  is  not  very  great.  It  requires  much  more  scientific  knowl- 
edge to  enable  men  to  guard  against  the  hookworm  and  the  various 
harmful  bacteria  which  infest  the  tropics.  These,  together  with 
venomous  insects  and  reptiles,  not  to  mention  the  larger  beasts 
of  prey,  imperil  the  lives  of  the  dwellers  in  the  tropics  quite  as 
much  as  our  cold  winters  imperil  the  lives  of  dwellers  in  these 
northern  latitudes. 

Northern-grown  crops  are  generally  best.  It  is  a  fact  of 
observation,  however  we  may  account  for  it,  that  many  of  our 
farm  crops  reach  their  highest  perfection  very  near  the  northern 
limits  of  the  areas  within  which  they  can  be  grown  without  injury 
from  the  frost.  The  Cotton  Belt  of  this  country,  though  confined 
to  the  Southern  states,  is  in  reality  near  the  northern  limit  for 
cotton.  Our  Corn  Belt  is  likewise  near  the  northern  limit  for  corn. 
The  oranges  of  California  and  Florida  also  are  grown  near  the 
line  where  frost  will  destroy  the  crop.  The  potato  and  the  sugar 
beet  do  best  either  in  high  altitudes  or  high  latitudes,  where  the 
summers  are  barely  warm  enough  and  the  seasons  barely  long 
enough  to  mature  the  crop. 

One  explanation  of  this  general  rule  is  that  by  migrating  north- 
ward a  plant  escapes  many  of  its  ancient  and  hereditary  enemies. 
WTien  seed  com  is  saved,  dried,  and  protected  during  the  winter, 
and  special  care  given  it  during  the  growing-season,  it  can  grow 
farther  north  than  would  be  possible  if  it  had  to  shift  for  itself. 
Its  natural  enemies  in  its  original  home,  not  having  man's  help, 
cannot  live  over  winter  or  mature  between  frosts  in  our  Corn  Belt. 
Therefore  the  corn  plant  escapes  some  of  its  worst  enemies.  The 
same  is  true  of  the  cotton  plant   (though  some  of  its  ancient 

i 


1 8  ELEMENTARY  ECONOMICS 

enemies  seem  to  be  following  it  northward)  and  also  of  other 
plants  which  seem  to  flourish  under  cultivation  in  latitudes  where 
they  could  not  survive  without  help.  This  is  an  important  factor 
in  enabling  large  numbers  of  men  to  produce  an  adequate  food 
supply  in  northern  latitudes. 

Similarly,  when  man  learns  to  keep  himself  warm  by  building 
houses,  manufacturing  clothing,  and  making  fires,  he  can  live  in 
latitudes  which  enable  him  to  escape  some  of  his  ancient  and 
hereditary  enemies,  such  as  the  hookworm  and  the  germs  of 
yellow  fever,  malaria,  etc.  The  northern  limit  of  his  best  develop- 
ment, however,  must  coincide  with  the  northern  limits  of  the 
production  of  abundant  means  of  satisfying  his  many  desires. 
Another  advantage  of  growing  food  crops  as  far  north  as  the 
seasons  will  permit  is  that  during  the  growing-season  for  plants 
— that  is,  during  the  summer — the  days  are  longer  in  high  than 
in  low  latitudes.  This  gives  plants  more  light  while  they  are 
growing.  The  proportion  of  sugar  in  sugar  beets,  for  example, 
seems  to  depend  partly  upon  the  amount  of  sunlight  which  they 
get  while  they  are  growing. 

Buckle's  generalizations.  In  his  famous  work,  "The  History 
of  Civilization  in  England,"  Henry  Thomas  Buckle  makes  a  great 
deal  of  several  other  factors  in  the  geographical  situation  besides 
those  already  mentioned.  These  he  groups  under  four  heads ; 
namely,  climate,  food,  soil,  and  the  general  aspect  of  nature.  He 
goes  to  the  extreme  of  attributing  to  these  factors  a  controlling 
influence,  not  only  on  the  economic  prosperity  of  the  people  but 
even  on  their  intellectual,  moral,  and  religious  development  as 
well.  Without  following  him  to  these  extremes,  we  may  profitably 
give  attention  to  some  of  his  observations  regarding  the  influence 
exercised  by  these  factors  on  the  industrial  development  of  a 
people.  No  one  is  likely  to  deny  that  the  presence  of  cheap  coal 
has  had  a  great  deal  to  do  with  the  economic  development  of 
Europe  and  America,  or  that  the  former  abundance  of  timber  in 
this  country  had  a  great  deal  to  do  with  the  kind  of  houses  we 
built  and  are  still  building.  A  shingled  roof,  for  example,  is  un- 
known except  in  countries  where  timber  has  been  abundant. 


THE  GEOGRAPHICAL  SITUATION  19 

That  ancient  civilizations  arose  in  regions  where  labor  applied 
to  land  was  highly  productive  is  a  commonplace  in  history.  The 
fertile  river  valleys  of  Egypt,  jMesopotamia,  India,  and  China 
supported  civilizations  when  our  European  ancestors  were  still 
savages.  Here  food  was  so  abundant  that  men  had  time  to  do 
other  things  besides  satisfying  their  immediate  daily  needs ;  or, 
rather,  a  part  of  the  population  could  produce  food  enough  to 
support  the  rest  while  the  latter  gave  their  time  to  other  things. 
The  civilizations  which  have  since  grown  up  in  latitudes  farther 
north  may  not  have  exceeded  those  earlier  civilizations  in  physical 
magnificence,  but  they  have  exceeded  them  in  all  that  makes  for 
the  comfort  and  well-being  of  the  average  man. 

On  the  other  hand,  the  overpowering  influence  of  the  terrific 
productiveness  of  nature  in  certain  tropical  regions  is  sufficient  to 
discourage  man's  enterprise.  Kipling's  story  entitled  ''Letting  in 
the  Jungle"^  gives  a  vivid  picture  of  the  way  in  which  the 
jungle  struggles  to  reassert  itself, —  to  flow  back,  as  it  were,  upon 
a  cleared  area  and  overwhelm  it  as  with  a  flood  of  rank  vegetation. 

It  should  be  remembered,  however,  that  this  dependence  of 
man  upon  nature  grows  less  and  less  with  the  advance  of  civili- 
zation. Alan  tends  more  and  more  to  dominate  nature  through 
his  greater  knowledge  of  ^nd  control  over  physical  forces.  It  is 
therefore  true,  as  stated  in  the  beginning  of  this  chapter,  that  the 
human  factor  is  today  more  important  than  the  geographical  factor. 

The  geographical  advantages  of  the  United  States.  Coming 
to  our  own  country,  we  have  a  combination  of  most  of  the  geo- 
graphical factors  mentioned  by  Buckle  and  others.  We  have  the 
broken  landscape,  low  mountain  ranges,  and  small  rivers  of  the 
Atlantic  seaboard,  the  great  fertile  valley  of  the  Mississippi  and 
its  tributaries,  the  vast  plains  of  the  great  West,  the  semidesert 
conditions  of  the  Southwest,  the  towering  mountain  ranges  of  the 
Rockies  and  the  Sierras,  and  the  mild  climate  and  gentle  slopes 
of  the  Pacific  coast.  If  the  mind  of  man  is  strongly  influenced 
by  its  geographical  surroundings,  we  have  an  opportunity  of 
developing  a  many-sided  and  variegated  civilization. 
1  In  "  The  Second  Jungle  Book." 


20  ELEMENTARY  ECONOIMICS 

Rainfall.  The  eastern  half  of  the  United  States,  being  vir- 
tually surrounded  on  three  sides  by  water,  like  the  greater  part 
of  Europe,  is  assured  of  an  adequate  quantity  of  moisture; 
the  western  half  is  more  or  less  deficient  in  moisture,  except 
the  extreme  northwest  corner  and  certain  high  mountain 
altitudes.  These  arid  and  semiarid  regions,  where  the  streams  do 
not  supply  water  enough  for  irrigation,  may,  in  places  where  con- 
ditions are  favorable,  be  made  to  grow  crops  under  methods  known 
as  dry  farming.  The  rest  will  probably  be  a  permanent  grazing 
country.  Even  our  irrigable  land,  while  but  a  fraction  of  the 
total,  amounts  to  a  small  empire  in  itself. 

The  great  crop  belts.  A  broad  strip  running  from  the  Atlantic 
seaboard  to  the  hundredth  meridian,  and  a  little  north  of  the 
middle,  comprises  the  great  grain,  hay,  and  live-stock  region. 
Another  broad  strip,  lying  south  of  this,  is  the  Cotton  Belt. 
Along  our  northern  border,  from  Maine  to  northern  New  York,  is 
a  lumber,  dairy,  and  potato  region  and  a  natural  summer  play- 
ground for  the  city  people.  A  continuation  of  this  strip,  includ- 
ing the  northern  halves  of  Michigan,  Wisconsin,  and  Minnesota, 
is  an  undeveloped  region,  formerly  covered  with  forest  but  now 
largely  cut  over.  Most  of  it  is  excellent  land  for  potatoes  and 
small  grains  and  is  capable  of  feeding  a  vast  population. 

Another  undeveloped  strip  along  the  Gulf  coast  from  Florida 
to  Texas,  just  south  of  the  Cotton  Belt,  is  also  largely  cut-over 
timberland.  Much  of  this  is  ideal  land  for  fruit  and  truck  farming 
and  the  growing  of  such  great  food  crops  as  sweet  potatoes. 

Whenever  the  demand  for  food  is  such  as  to  insure  a  remunera- 
tive price  for  potatoes,  both  white  and  sweet,  almost  unimaginable 
quantities  can  be  grown  along  our  northern  and  southern  borders 
without  interfering  with  the  growing  of  corn,  wheat,  or  cotton  in 
the  belts  which  are  especially  adapted  to  these  great  crops.  So 
far  as  starchy  food  is  concerned  we  have  opportunities  for  produc- 
ing incalculable  quantities.  Animal  products  also  can  be  produced 
in  quantities  sufficient  for  a  population  very  much  greater  than 
the  present,  though  it  is  easy  for  unthinking  people  greatly  to 
exaggerate  the  possibilities  in  this  direction. 


THE  GEOGRAPHICAL  SITUATION 


21 


The  central  valley.  The  Mississippi  Valley — that  is,  the 
whole  interior  basin  of  the  country — is  one  of  the  most  productive 
regions  in  the  entire  world.  In  fact,  it  is  doubtful  if  any  region 
of  equal  area  can  be  found  anywhere  on  the  globe  which  contains 
so  great  a  variety  and  abundance  of  natural  riches,  both  on  the 
surface  and  beneath  the  surface. 

This  region  includes  the  greater  part  of  our  Cotton  Belt,  and  we 
produce  nearly  three  fourths  of  the  cotton  of  the  world.  It  in- 
cludes all  of  what  is  known  as  our  Corn  Belt ;  that  is,  the  region 
where  corn  is  the  main  crop,  though  corn  is  grown  in  every  state 


THE  SOURCE  OF  THE  GREATER  PART  OF  THE  WORLD  S   CLOTHING 


in  the  Union.  Com  is  not  only  our  most  valuable  crop  but  our 
most  valuable  single  product  of  any  kind  or  description ;  we  also 
grow  nearly  three  fourths  of  the  world's  production  of  this,  the 
most  magnificent  of  all  crops.  In  this  region  are  also  the  great 
spring-wheat  areas  of  Minnesota  and  the  Dakotas  and  the  winter- 
wheat  area  extending  from  Ohio  to  the  Great  Plains,  reaching 
its  greatest  density  in  Kansas  and  Nebraska.  While  we  produce 
on  the  average  only  between  a  fourth  and  a  third  of  the  world's 
total  wheat  crop,  we  yet  produce  more  than  any  other  single 
country  at  the  present  time.  Aside  from  these  major  crops,  this 
region  is  also  rich  in  a  number  of  minor  crops  and  grows  practically 
everything  which  will  grow  outside  the  tropics. 

Farm  machinery.  The  reasons  for  this  great  productivity 
are,  first,  the  vast  area ;  second^Jhe  uniform  fertility  of  the  joil; 
third,    the   uniformly  ^l£velconto^^;::::aH&kifig^arm    operations 


2  6  ELEMENTARY  ECONOMICS 

relatively  easy  and  inexpensive;  fourth,  the  uniformly  favorable 
climate ;  fifth,  the  general  use  of  farm  machinery.  There  is 
probably  no  single  area  in  the  world  where  so  much  and  such 
efficient  farm  machinery  is  used  in  order  to  supplement  the 
labor  of  men. 

In  addition  to  the  natural  ingenuity  of  our  people,  the  general 
smoothness  of  the  land  and  the  favorableness  of  the  climate 
must  be  held  to  account  for  the  use  of  farm  machinery.  The 
summers  (especially  the  late  summer  months)  in  this  region  are 
relatively  dry.  This  has  had  an  important  effect  in  encouraging 
the  use  of  harvesting  and  haymaking  machinery.  In  some  of  the 
countries  of  northwestern  Europe,  where  clear,  dry  weather  is  rare, 
the  curing  of  hay  and  the  drying  of  harvested  grain  are  more 
difficult  problems  than  with  us.  The  quick  curing  and  rapid 
methods  of  harvesting  and  storing  which  are  familiar  to  us  are 
there  impossible. 

Mineral  wealth.  Beneath  the  soil  in  this  region  lies  a  wealth 
of  minerals.  Bituminous  coal  underlies  a  great  deal  of  it  from 
Pennsylvania  to  Wyoming.  Petroleum  and  natural  gas  abound 
in  the  same  region,  and  oil  fields  extend  southward  to  the  Gulf. 
Some  of  the  richest  and  most  extensive  beds  of  iron  in  the  world 
lie  in  northern  Michigan  and  Minnesota. 

Ease  of  transportation.  Throughout  this  region  transportation 
is  easy.  The  Great  Lakes  furnish  cheap  water  transportation,  as 
do  (to  a  less  extent)  the  Mississippi  and  its  larger  tributaries.  But 
its  greatest  advantage  for  transportation  is  its  wide  extent  and  its 
level  contour,  making  railroad  building  and  operation  relatively 
inexpensive. 

Bordering  on  this  vast  region,  which  must  more  and  more  be- 
come the  real  home  and  habitat  of  the  American  people,  are  the 
Atlantic  and  Pacific  seaboards,  adding  other  mineral  wealth, 
forests,  water  power,  fisheries,  and  opportunities  for  foreign  trade 
to  the  wealth-producing  power  of  the  whole. 

Reasons  for  modesty  as  well  as  for  pride.  Before  we  take 
too  much  credit  for  our  national  wealth  and  prosperity  we  should 
ask  ourselves  to  what  extent  we  are  responsible  for  it  and  to 


THE  GEOGRAPHICAL  SITUATION  27 

what  extent  nature  assisted  us.  It  will  be  a  wholesome  exercise 
for  us  to  write  down  a  list  of  achievements  in  what  we  have 
led  the  world,  and  then  to  ascertain  to  what  extent  these  are 
due  to  our  own  intelligence,  energy,  courage,  and  devotion  to 
ideals  and  to  what  extent  to  our  favorable  geographical  situation 
and  the  richness  of  our  resources. 

We  produce  more  iron  and  steel,  more  corn,  cotton,  and  wheat, 
than  any  other  country.  There  are  excellent  geographical  reasons 
why  we  should.  Mechanical  inventions,  the  breeding  of  the  trot- 
ting horse,  and  the  building  of  public  libraries  are  among  the 
activities  in  which  we  have  surpassed  other  people  without  the 
special  aid  of  superior  physical  advantages. 

,  ,,     ^  EXERCISES  •    ,  .  >>-^  y^^ 

1.  What  is  meant  by  a  favorable  geographical  situation?  .^s.^^Jit^ 

« Z.  -Whereto  most  crops  reach  their  highest  development  P?^**'"' 

3.  Does  man's  dominion  over  nature  increase  or  does  it  decrease 
with  the  advance  of  civilization? 

4.  Are  the  tropics  more  favorable  or  are  theyJess-favorable  to  man's . 
development  than  the  temperate  zones?    Give  reasons.-  /        >' V    -'A-xi- 

5.  Name  some  of  the  geographical  advantages  of  the  United/States   /.  vl/ 
(i)    in   agriculture,    (2)    in   mining,    (3)    in   transportation,    (4)    in    *'*"*~*^ 
manufacturing.  -,         ^^  -  '.Xf^/a^ 

6.  Name  some  activities  in  which  the  people  of  the  United  States 
excel  the  rest  of  the  world.  Has  our  success  been  due  mainly  to  our- 
selves, to  our  geographical  situation,  or  to  a  combination  of  both? 


CHAPTER  IV 
THE  QUALITY  OF  THE  PEOPLE 

If  the  human  factor  is,  as  stated  in  Chapters  I  and  III,  the 
most  important  factor  in  national  prosperity,  it  is  more  important 
that  we  study  this  factor  than  that  we  study  the  geographical 
situation.  The  human  factor  includes  the  people  themselves  and 
their  institutions — their  habits,  customs,  laws,  government, 
morals,  and  religion.  In  this  chapter  we  are  to  consider  the 
quality  of  the  people  themselves  and,  in  the  chapters  which  follow, 
some  of  their  institutions. 

Why  man  rules  over  the  rest  of  animal  creation.  In  attempt- 
ing to  discuss  the  quality  of  the  people  we  must  limit  ourselves  to 
a  few  of  the  most  important  facts.  There  are  certain  outstanding 
qualities  which  man  possesses  in  greater  degree  than  the  brutes, 
which  civilized  man  possesses  in  greater  degree  than  the  savage, 
and  which,  in  any  civilized  community,  the  tnore  successful  classes 
possess  in  greater  degree  than  the  less  successful.  There  are  other 
qualities,  such  as  muscular  strength,  which  the  brutes,  many  of 
them  at  least,  possess,  in  greater  degree  than  man.  If  these  were 
the  important  qualities,  man  could  scarcely  claim  superiority  over 
the  brutes.  There  are  other  qualities,  such  as  the  sense  of  smell 
and  the  ability  to  endure  pain,  which  certain  savages  seem  to 
possess  in  greater  degree  than  civilized  man.  If  these  were  the 
important  qualities,  civilized  man  could  scarcely  claim  superiority. 

Our  present  problem  is  to  form  some  sort  of  intelligent  opinion 
as  to  the  qualities  which  a  people  need  in  order  to  become  pros- 
perous, powerful,  and  great  in  an  economic  and  worldly  sense. 
The  following  outline  is  suggested.  Whatever  may  be  said  on 
purely  religious  or  moral  grounds,  a  nation  whose  people  are  pos- 
sessed of  these  qualities  in  superior  degree  will  have  an  economic 
advantage  over  a  nation  whose  people  possess  them  in  less  degree. 

28 


THE  QUALITY  OF  THE  PEOPLE  29 

THE  CHAIL\CTERISTICS  OF  A  CAPABLE  RACE 

1.  Knowledge  of 

a.  The  physical  world 

b.  The  world  of  men 

2.  Forethought,  as  shown  by 
K   ji^.  Industry 

'^    b.  Thrift 

3.  Dependableness,  made  up  of 

a.  Honesty 

b.  Sobriety 

c.  Courage 

d.  Fidehty 
Reasonableness,  as  shown  by 

a.  Eagerness  to  learn 

b.  Obedience  to  law 

c.  Willingness  to  cooperate 

Man  has  achieved  "  dominion  over  the  fish  of  the  sea,  and  over 
the  fowl  of  the  air,  and  over  the  cattle,  and  over  all  the  earth,  and 
over  every  creeping  thing  that  creepeth  upon  the  earth"  by  reason 
of  certain  powers  or  qualities  which  he  possesses  in  higher  degree 
than  the}'.  These  are,  first,  his  greater  knowledge  of  and  control 
over  the  forces  of  nature ;  second,  his  greater  forethought  in 
making  provision  for  the  future  and  working  for  distant  ends ; 
third,  his  greater  power  of  organization,  or  teamwork.  This 
power  of  organization  is  the  result  mainly  of  two  factors — his 
dependability  and  his  reasonableness.  The  same  powers,  or  qual- 
ities, have  given  the  civilized  man  dominion  over  the  savage  and 
the  intellectual  man  dominion  over  the  ignorant  man.  In  the 
future,  as  in  the  past,  we  must  expect  the  world  will  be  ruled  by 
the  nations  which  possess  these  qualities  in  the  highest  degree. 

Physical  advantages  over  the  brutes.  INIan's  erect  posture, 
leaving  his  hands  free  to  be  used  for  other  purposes  than  for 
locomotion,  must  be  counted  as  a  great  advantage  over  the  brute 
creation.  A  thumb  which  opposes  the  fingers  and  gives  him  a 
better  grasp  adds  greatly  to  this  advantage.  These  advantages, 
however,  would  not  count  for  much  if  he  did  not  have  a  mind 
which  enabled  him  to  devise  tools  to  be  grasped  and  used  with  his 


30 


ELEMENTARY  ECONOMICS 


thumbed  hands.  So  far  as  the  upright  posture  and  the  thumb  are 
concerned,  while  they  give  man  an  advantage  over  the  brutes,  they 
alone  do  not  give  the  civilized  man  any  advantage  over  the 
savage.  The  posture  of  the  savage  is  as  upright,  and  his  thumb 
as  handy,  as  the  civilized  man's.  In  seeking,  therefore,  the  ad- 
vantages which  have  given  the  civilized  man  dominion  over  the 
savage  we  must  look  at  the  mental  and  moral  qualities. 

Intellectual  advantages  of  civilized  man  over  savages. 
Knowledge  of  the  forces  of  nature  may  almost  be  said  to  include 
control  over  them,  though  the  erect  posture  and  the  thumb  assist 
in  that  control.  The  physical  world  includes  not  only  the  physical 
objects  which  surround  us  but  their  properties  and  the  forces 
which  govern  them  as  well.  To  know  our  physical  world,  there- 
fore, means  to  know  the  properties  of  matter  and  the  forces  which 
operate  in  and  through  it.  In  short,  this  is  to  have  scientific  knowl- 
edge. It  is  this  which  underlies  all  our  mechanical  improvements. 
Our  social  environment  includes  human  beings  and  all  their  powers, 
characteristics,  habits,  emotions,  etc.  A  knowledge  of  one's  social 
environment  includes  such  a  knowledge  of  man  and  his  ways  as 
will  enable  one  to  work  with  other  men  comfortably,  knowing 
what  to  expect  and  what  to  depend  upon.  This  is  particularly 
important  in  those  who  are  intrusted  with  the  work  of  governing. 

Forethought.  Forethought  is  only  one  aspect  of  what  may  be 
called  the  time  sense.  Among  the  many  definitions  of  man  is  one 
which  says  that  he  is  the  being  "who  looks  before  and  after." 
His  memory  of  the  distant  past  and  forethought  for  the  distant 
future  modify  his  actions  in  the  immediate  present  more  than  the 
actions  of  any  other  creature  are  modified. 

Even  industry  is  chiefly  carried  on  because  of  the  vivid  appre- 
ciation in  the  present  of  those  needs  which  are  certain  to  arise  in 
the  future.  Those  creatures  which  appreciate  future  needs  most 
vividly  will,  of  course,  labor  most  assiduously.  The  same  difference 
shows  itself  among  men.  Those  nations  and  those  individuals  who 
see  most  clearly  in  advance  what  their  future  needs  are  likely  to 
be  are  the  nations  and  the  individuals  who  show  the  greatest 
industry  and  the  greatest  thrift. 


THE  QUALITY  OF  THE  PEOPLE  31 

Thrift.  Thrift  differs  from  industry  in  that  it  consists  in  saving 
tliat  which  is_already  produced  or  possessed,  whereas  industry 
consists  in  producing  or  gaining  possession  of  desirable  objects. 
Even  more  than  industry',  thrift  is  a  mark  of  forethought.  It  re- 
quires an  even  stronger  self-control,  combined  with  a  keener  sense 
of  the  importance  of  future  needs,  to  lead  one  to  refrain  from 
consuming  that  which  is  already  produced  than  it  does  to  work 
to  produce  that  which  does  not  yet  exist.  However,  the  two 
things  must  always  go  together,  in  the  community  at  least  if  not 
in  the  individual.  Some  farmer  must  save  seed  before  any  farmer 
can  labor  successfully  at  the  growing  of  next  year's  crop. 

Knowledge  and  forethought  are  primarily  mental  qualities, 
though  there  is  an  element  of  morality  in  forethought ;  depend- 
ableness  and  reasonableness  are  primarily  moral  qualities,  though 
there  is  an  element  of  mentality  in  both  of  them.  In  this  age  of 
great  mental  achievements,  especially  in  the  fields  of  physical 
science  and  mechanical  invention,  there  is  a  tendency  to  under- 
estimate the  importance  of  moral  qualities.  This  tendency  may 
have  been  increased  by  the  perception  that  moral  teachers  them- 
selves have  sometimes  overemphasized  the  lesser  virtues — that  is, 
those  which  count  least  in  the  improvement  of  human  life — and 
underemphasized  those  which  count  most. 

Moral  advantages  of  civilized  men  over  savages — depend- 
ableness.  Nothing  can  be  more  important  in  the  building  of  a 
great  and  prosperous  nation  than  dependableness.  Many  writers 
have  taken  pains  to  point  out  how  dependent  we  are  upon  one 
another  in  a  highly  civilized  state.  One  way  of  illustrating  this 
mutual  dependence  is  by  comparing  a  highly  developed  society 
with  a  complicated  machine  or  a  highly  developed  animal  or- 
ganism. There  are  many  striking  resemblances,  among  the  most 
important  of  which  is  the  interdependence  of  parts. 

This  interdependence  of  parts  increases  as  we  ascend  in  the 
scale  of  organic  life.  In  the  human  body,  for  example,  or  in  that 
of  any  of  the  higher  mammals  the  interdependence  of  parts  is 
much  greater  than  that  found  in  the  bodies  of  the  lower  forms  of 
life.    The  same  change  is  noticeable  as  we  ascend  in  the  scale  of 


32  ELEMENTARY  ECONOMICS 

social  life.  Each  individual  tends  to  specialize  in  some  particular 
kind  of  work  and  to  depend  upon  other  individuals  who  have 
specialized  in  other  kinds  of  work  to  supply  him  with  goods  and 
services  which  he  cannot  produce  or  perform  for  himself.  Some 
of  the  reasons  why  this  is  so  advantageous  will  be  discussed  in 
the  chapter  on  The  Division  of  Labor. 

There  can  be  no  great  amount  of  dependence  of  one  upon  an- 
other where  the  people  are  not  dependable.  This  is  equally  true 
of  a  machine  or  an  animal  organism,  but  we  do  not  attribute 
moral  qualities  to  the  parts  of  any  of  them.  The  wheel  in  a 
machine  has  no  choice.  It  must  of  physical  necessity  do  whatever 
its  construction  requires  it  to  do.  Although  there  is  no  physical 
necessity  compelling  a  person  to  be  dependable,  as  is  the  case 
with  the  parts  of  a  well-made  machine  or  the  organs  of  a  healthy 
body,  yet  it  is  just  as  important  that  he  should  be ;  otherwise 
civilization  cannot  advance  at  all. 

Our  mutual  dependence  is  of  various  sorts  and  degrees.  If 
someone  fails  to  do  that  which  he  is  expected  to  do,  he  may  im- 
peril the  lives  of  hundreds  or  thousands  of  his  fellow  men,  as  in 
the  case  of  a  switch  tender  or  a  locomotive  engineer ;  he  may 
occasion  the  loss  of  valuable  property  or  he  may,  as  in  the  case 
of  an  unpunctual  person,  merely  upset  our  calculations  and  cause 
many  of  us  to  waste  our  time  waiting  for  him  or  guessing  what 
he  is  likely  to  do.  In  all  these  cases,  in  greater  or  less  degree, 
the  undependable  person  occasions  loss  to  the  nation.  The  time 
we  waste  on  account  of  his  lack  of  dependableness  is  as  truly  a 
loss  as  the  property  which  is  destroyed.  Aside  from  the  direct 
loss  of  time  and  property  there  is  the  greater  loss  which  comes 
from  the  discouragement  of  enterprise,  the  lack  of  confidence,  and 
the  general  demoralization  which  ensue  when  men  can  no  longer 
rely  upon  one  another.  When  we  can  no  longer  depend  upon  others 
to  do  their  special  work  well  and  regularly  we  shall  have  to  learn 
to  do  everything  for  ourselves.  We  thus  lose  the  advantages  of 
specialization. 

Honesty.  The  first  element  in  dependableness  is  common 
honesty.    Men  who  will  not  keep  their  word,  fulfill  their  contracts, 


THE  QUALITY  OF  THE  PEOPLE  33 

or  do  business  without  cheating  are  not  only  morally  odious, 
they  are  also  obstructions  to  the  progress  and  prosperity  of  the 
community.  Perhaps  this  is  why  they  are  morally  odious.  A  com- 
munity made  up  of  such  people,  no  matter  how  gifted  they  might 
be  mentally,  could  scarcely  prosper.  Xo  one  could  trust  anyone 
else ;  consequently  there  could  be  no  credit.  Nothing  could  be 
bought  or  sold  without  the  closest  and  most  minute  inspection, 
and  this  would  be  laborious  and  therefore  wasteful  of  time.  There 
could  be  no  cooperation  or  teamwork,  but  everyone  would  have  to 
look  after  himself  and  spend  a  great  deal  of  time  watching  his  dis- 
honest neighbors.  Among  the  many  advantages  of  honesty,  there- 
fore, not  the  least  is  that  it  is  a  great  labor-saving  device  when 
it  is  practiced  throughout  a  community. 

Sobriety.  Next  to  honesty,  sobriety  is  probably  the  most 
important  element  in  dependableness.  In  a  rudimentary  state  of 
society,  where  each  individual  works  and  acts  most  of  the  time 
alone  and  where,  therefore,  there  is  little  interdependence,  drunk- 
enness may  not  be  so  vicious  as  it  has  now  become.  In  our  inter- 
locking civilization  no  personal  habit  or  v-ice  so  unfits  a  man  for 
usefulness  as  drunkenness.  If  you  had  to  take  your  choice  between 
riding  behind  a  locomotive  engineer  who  was  addicted  to  drunken- 
ness and  riding  behind  one  who  was  addicted  to  any  other  vice, 
there  is  not  much  doubt  as  to  which  you  would  choose.  If  you 
had  to  take  your  choice  between  having  chauffeurs  on  the  street 
who  were  in  the  habit  of  getting  drunk  and  having  those  who  had 
formed  any  other  bad  habit  whatsoever,  you  would  not  be  likely 
to  prefer  the  drunkards. 

Apply  a  similar  test  to  anyone  in  any  of  the  hundreds  of  re- 
sponsible positions  (and  all  positions  are  coming  to  be  responsible 
positions),  and  you  will  reach  the  conclusion  that  the  person  who 
is  strongly  addicted  to  driiJc^s_about  the  least  dependable,  and 
therefore  the  least  desirable,  citizen  you  can  name.  There  are 
fewer  places  where  he  is  of  any  use  and  more  where  he  is  a  menace 
than  is  the  case  with  the  victims  of  almost  any  other  vice.  What- 
ever you  may  think  when  you  are  discussing,  in  the  abstract,  the 
relative  harmfulness  of  various  vices,  you  are  not  likely  to  be 


34  ELEMENTARY  ECONOMICS 

much  in  doubt  when  you  come  to  a  concrete  case  like  that  of  a 
locomotive  engineer,  a  switchman,  a  driver  of  an  automobile,  or 
even  a  janitor  or  anyone  else  whose  lack  of  dependableness  might 
endanger  your  life.  Sobriety  must  obviously  rank  high  among  the 
virtues  which  go  to  make  up  what  we  have  called  dependableness. 

Courage.  Courage  is  the  father  of  many  virtues,  as  fear  is  of 
many  vices.  It  is  probable  that  as  many  falsehoods  result  from 
fear  as  from  malice.  In  any  kind  of  emergency  you  will  want 
dependable  companions  who  will  not  fail  you.  Their  dependable- 
ness will  be  in  proportion  to  their  courage.  Even  your  own  courage 
may  depend  partly  upon  their  courage,  and  theirs  upon  yours ; 
that  is  to  say,  when  you  feel  that  you  can  rely  upon  one  another 
you  will  all  feel  more  courageous  and  more  capable  of  coping  with 
a  difficult  situation  than  if  each  of  you  doubts  the  courage  of  the 
others.  This  applies  not  only  to  physical  courage  in  a  time  of 
physical  danger  but  to  moral  courage  in  times  when  the  larger  in- 
terests of  society  are  at  stake.  Men  of  little  courage  fear  to  come 
out  on  the  right  side,  and  even  men  of  real  courage  have  their 
confidence  shaken  by  the  feeling  that  they  cannot  depend  upon 
their  fellow  citizens. 

Fidelity.  Fidelity  is  closely  related  both  to  honesty  and  to 
courage  and  serves  much  the  same  purpose.  It  is  the  quality  which 
keeps  faith  even  though  one  might  gain  some  individual  advan- 
tage by  breaking  faith.  The  habit  of  breaking  faith  or  abusing 
confidence  demoralizes  a  group  or  a  community  and  makes  any 
kind  of  effective  teamwork  impossible. 

There  are  doubtless  many  other  elements  which  contribute  to 
the  dependableness  of  a  people,  but  the  four  mentioned  are  the 
principal  ones.  Any  group  of  people  who  possess  these  in  high 
degree  can  rely  upon  and  cooperate  with  one  another  and  carry  out 
any  form  of  teamwork  which  they  have  the  intelligence  to  plan. 
A  community  whose  people  are  weak  in  any  one  of  these  four 
qualities  will  have  difficulty  in  carrying  out  any  effective  scheme  of 
group  action,  no  matter  how  clearly  they  perceive  the  advantage 
of  doing  so.  While  these  are  moral  qualities,  nevertheless  the 
economic  prosperity  of  the  nation  depends  upon  them.    They  are, 


THE  QUALITY  OF  THE  PEOPLE  35 

therefore,  of  just  as  much  interest  to  the  economist  as  technical 
skill,  good  tools,  good  land,  mineral  resources,  or  any  other  factor. 

Reasonableness.  Reasonableness  is  a  noticeable  characteristic 
of  progressive  people,  as  its  absence  is  of  unprogressive  people. 
It  includes  freedom  from  prejudice,  passion,  and  superstition, 
willingness  to  take  a  sensible  view  of  things  and  to  be  guided  by 
sound  judgment  rather  than  by  passion,  stubbornness,  or  gen- 
eral contrariness.  It  is  opposed  equally  to  the  slavish  following  of 
old  customs,  on  the  one  hand,  and  blind  and  headlong  pursuit  of 
new  fads,  on  the  other.  It  involves  a  frank  recognition  of  all  the 
necessary  conditions  of  social  life  and  teamwork  and  a  willingness 
to  submit  to  those  conditions  even  at  some  inconvenience  to  self. 
It  involves  the  willingness  to  help  in  any  genuine  reform  movement, 
even  at  some  inconvenience  to  self,  and  likewise  a  recognition  of 
the  necessary  and  legally  constituted  methods  of  effective  reform. 

Jeachableness.  The  first  element  in  reasonableness  is  teach- 
ableness, or  eagerness  to  learn,  especially  to  learn  better  ways  of 
doing  the  work  which  we  have  to  do.  Travelers  among  backward 
races  give  many  strange  accounts,  not  simply  of  the  ineffective 
methods  of  work,  which  we  might  expect,  but  of  the  unwillingness 
of  the  people  to  learn  new  ways  even  when  they  are  shown.  One 
railroad  builder  who  was  forced  to  employ  native  laborers  in  a 
backward  country,  which  need  not  be  named,  found  that  they 
were  accustomed  to  carry  all  burdens  on  their  heads.  In  moving 
dirt  they  insisted  even  on  carrying  it  in  boxes  and  various  re- 
ceptacles on  their  heads.  He  supplied  them  with  wheelbarrows 
and  gave  orders  that  they  were  to  use  these  and  nothing  else.  They 
used  the  wheelbarrows,  but  carried  them  also  on  their  heads,  and 
nothing  could  induce  them  to  change  their  immemorial  custom. 
No  nation  whose  people  are  so  unteachable  as  this  is  likely  to 
become  prosperous,  or  great  in  any  sense,  no  matter  how  well  en- 
dowed it  may  be  with  natural  resources. 

This  difficulty  is  not  simply  a  lack  of  knowledge.  It  is  more 
fundamental  than  that.  It  is  a  habit  of  mind  which  resists  knowl- 
edge, which  refuses  to  accept  knowledge  even  when  it  is  pre- 
sented.  WTiether  this  is  due  to  some  defect  in  the  physiology  of 


36  ELEMENTARY  ECONOMICS 

the  people  or  merely  to  bad  teaching  in  the  past  it  may  be  difficult 
to  determine.  That  there  are  real  differences  of  this  kind  among 
people  there  can  be  little  reasonable  doubt.  A  wise  but  strong 
ruler  who  would  establish  a  system  of  compulsory  education  and 
enforce  it  rigidly  could  doubtless  accomplish  a  great  deal  in  the 
way  of  increasing  the  teachableness  of  the  people.  During  their 
enforced  schooling  they  would  form  the  habit  of  learning,  and  the 
pain  of  a  new  idea  would  be  greatly  reduced.  A  wise  majority 
in  a  democracy  might  do  the  same  thing  for  an  unwise  minority. 

Coyetousness.  There  is  another  form  of  unreasonableness,  and 
it  is  probably  the  most  destructive  of  all,  which  takes  the  form  of 
jealousy  or  resentfulness  at  the  success  of  other  people.  It  is  the 
worst  form,  perhaps  the  only  real  form,  of  covetousness.  There 
are  few  things  which  so  deaden  the  enterprising  and  constructive 
spirit  of  a  people  as  this  form  of  resentfulness,  and  there  are  few 
things  which  so  encourage  that,  spirit  as  a  generous  appreciation, 
on  the  part  of  everyone,  of  real  achievement  wherever  it  is  foJnd. 

Obedience  to  law.  Another  important  element  in  reasonable- 
ness is  the  recognition  of  the  fact  that  if  we  are  going  to  live  to- 
gether in  groups  it  is  necessary  for  each  of  us  to  submit  to  many 
regulations,  some  of  them  at  times  irksome,  which  would  be 
unnecessary  if  we  could  live  as  isolated  individuals.  This  is 
commonly  called  obedience  to  law.  This  need  not  be  a  slavish 
acceptance  of  all  laws  as  they  now  stand,  but  it  at  least  involves  a 
recognition  of  the  orderly  and  legally  constituted  methods  of 
changing  laws  rather  than  a  stubborn  and  brutal  defiance  of  those 
which  we  do  not  happen  to  like.  The  purpose  of  law  is  not  to 
repress  or  obstruct,  but  to  make  free — to  release  energy.  The 
traffic  policeman  on  a  crowded  street  corner  is  a  good  illustration 
of  all  enforcement  of  law.  He  is  not  there  to  obstruct  or  hinder 
traffic,  though  he  does  undoubtedly  hinder  some  unreasonable  people 
from  doing  what  they  would  like  to  do.  But  as  the  result  of  such 
hindrances,  traffic  can  move  more  freely  than  it  could  without 
them,  and  thus  the  average  person  actually  enjoys  greater  freedom 
of  movement  than  would  otherwise  be  possible.  A  reasonable 
person  always  recognizes  this  fact  and  submits  to  such  regulations. 


THE  QUALITY  OF  THE  PEOPLE  37 

The  world  has  generally  been  dominated  by  peoples  who  were 
law-abiding.  No  nation  whose  people  refused  to  submit  to  the 
necessary  regulations  could  ever  hope  to  grow  prosperous  or  power- 
ful enough  to  play  much  of  a  part  in  civilization.  It  would  be 
as  reasonable  to  expect  a  disorganized  mob,  each  individual  of 
which  followed  his  own  whims,  to  succeed  against  a  well-organized 
and  well-disciplined  army.  The  results  of  a  lack  of  discipline 
come  more  quickly  in  war  than  in  peace,  but  they  are  no  more 
certain  in  the  one  case  than  in  the  other.  It  is  particularly  im- 
portant that  this  kind  of  reasonableness  shall  exist  in  a  democracy. 
Under  a  despotism  the  subjects  may  be  compelled  by  fear  to  sub- 
mit to  regulations ;  in  a  democracy  their  submission  must  be 
largely  voluntary.  In  other  words,  it  depends  upon  the  reason- 
ableness of  the  people. 

Willingness  to  cooperate.  Willingness  to  cooperate,  where 
cooperation  is  desirable,  even  without  legal  compulsion,  is  a  very 
important  factor  in  the  prosperity  of  any  community.  Even  where 
everyone  agrees  that  cooperation  is  needed  it  is  frequently  difficult 
to  get  people  to  cooperate  for  community  work.  The  reasons 
are  many,  and  some  of  them  are  hard  to  understand.  Personal 
jealousies,  old  grudges,  mutual  distrust,  and  even  general  all-round 
meanness  are  given  as  the  principal  reasons.  It  is  sometimes  said 
that  the  lack  of  leaders  is  the  great  difficulty.  It  is  quite  as 
frequently  the  lack  of  followers.  Everyone  wants  to  be  a  leader 
and  is  not  willing  to  follow  anyone  else.  With  such  a  spirit  among 
the  people  the  indispensable  man  is  more  likely  to  be  the  orator 
or  the  persuader  than  the  statesman  or  the  administrator. 
A  people  among  whom  the  efficient  man  is  popular  will  never  be 
outstripped  in  the  arts  of  peace  or  beaten  in  war  by  a  people 
among  whom  only  a  demagogue  or  even  a  persuasive  orator  can 
be  popular. 

Heredity  and  training.  A  great  deal  has  been  written  regard- 
ing the  comparative  importance  of  heredity  and  training  in  the 
determination  of  ability  and  character.  Some  have  gone  to  the 
extreme  of  saying  that  heredity  is  everything,  that  a  genius  will 
always  become   a  genius   in   spite  of   the   lack  of   educational 


38    •  ELEMENTARY  ECONOMICS 

advantages, — in  short,  that  he  will  find  his  own  means  of  education. 
Others  have  gone  so  far  as  to  deny  that  heredity  has  anything  to 
do  with  a  man's  ability ;  they  claim  that  it  is  all  in  his  education, 
including  under  education  all  the  influences  which  have  been  at 
work  since  his  birth  in  developing  his  mind  or  shaping  his  char- 
acter. The  truth,  as  in  most  such  cases,  seems  to  be  somewhere 
between  these  extremes.  There  is  no  doubt  whatever  that  men  of 
average  natural  ability  may  be  greatly  improved  by  education  and 
training,  nor  is  there  any  reasonable  doubt  that  some  are  capable 
of  being  trained  much  more  highly  than  others  because  of  a 
difference  in  natural  ability. 

Early  education  can  improve  the  present  generation.  WTiat- 
ever  may  be  said  regarding  the  relative  importance  of  the  natural 
ability  of  the  people  and  their  training,  it  is  absolutely  certain 
that  it  is  more  important  for  the  present  generation  to  give  atten- 
tion to  the  problem  of  its  own  training  than  to  the  problem  of  its 
own  heredity.  The  latter  cannot  now  be  changed,  and  there  is  no 
use  worrying  about  it.  The  only  thing  to  do  is  to  make  the  most  of 
its  inheritance  and  see  that  it  gets  the  best  possible  training.  The 
only  heredity  we  need  to  worry  about  is  that  of  future  generations. 

EXERCISES 

1.  Is  man  superior  to  the  bnites  in  every  respect?  In  what  re- 
spects does  he  excel  them  ? 

2.  Is  the  civilized  man  superior  to  the  savage  in  every  respect  ?  In 
what  respects  is  he  superior? 

3.  Do  you  consider  those  qualities  in  which  the  civilized  man  excels 
the  savage  as  more  important  or  less  important  than  those  qualities 
in  which  the  savage  excels  the  civilized  man  ?^  sAVhy  ? 

^-^^'^^A.  Of  wbat  aiiivantagejs  forethought?   HoW  do  men  s^ow  fore- 

thought?  '•v;t;Ct.4::^rt-    ; ,,  —. ;'  :""'  / 

5.  Of  what  advantage  is  dependableness  ?  Is  it  growing  more  im- 
portant ?   Why  ?   How  do  men  show  jiependableness  ? 

'l.\jiM"/'   ^'  ^^   what    advantage    is    I'easonableness  ?    How    do    men    show 
T^      reasonableness  ?  '  '• 

7.  What  are  the  principal  factors  in  the  improvement  of  the  quality 
of  a  people  ?  •~^^4*^ 


-^^      i^- 


jL,       "  '" 


COMPETITION 


What  is  competition  ?  In  the  last  chapter  we  considered  the 
quahty  of  the  people  themselves.  We  have  next  to  consider  some 
of  their  waysjoLiiQingJLhings,  their  leading  habits,  customs,  and 
institutions^  in  so  far  as  these  affect  their  prosperity.  One  of  their 
noticeable  ways  is  that  which  is  known  as  competition.  This 
refers  to  a  way  we  have  of  striving,  sometimes  against  one  an- 
other, to  get  what  we  want.  When  there  us  one  prize  to  be  won 
and  more  than  one  person  who  would  like  to  win  it,  there  is 
pretty  certain  to  be  rivalry.  If,  in  order  to  win  it,  one  must  do 
something  useful  rather  than  harmful,  there  will  be  rivalry  in 
doing  something  useful.  That  is  called  competition.  If,  however, 
it  may  be  won  by  doing  something  harmful  rather  than  useful, 
there  is  likely  to  be  rivalry  in  doing  harm.  This  is  not  competition, 
but  war  or  swindling^oi^  something  of  that  kind. 

Whywe  compete.  In  no  case  is  lhere_competition-except 
where  there Js-scareity.  If  there  were  enough  prizes  for  everybody 
and  they  were  all  of  the  same  desirability,  there  would  be  nothing 
for  which  to  compete.  But  if  there  are  not  enough  of  the  best  prizes 
to  satisfy  everybody,  there  is  pretty  certain  to  be  competition. 
We  do  not  ordinarily  compete  for  air  because  we  all  have  enough. 
WTiere  water  is  abundant  we  do  not  compete  for  it ;  where  it  is 
scarce  we  do. 

The  struggle  for  existence.  It  is  a  common  error  to  speak  of 
competition  as  though  it  were  synonymous  with  war  or  with  the 
struggle  for  existence  as  it  is  carried  on  among  brutes.  That 
competition  is  a  form  of  conflict  there  can  be  no  doubt,  nor  can 
it  be  denied  that  it  is  a  phase  of  the  all-but-universal  struggle  for 
existence.  But  there  are  many  forms  of  conflict  besides  war,  and 
there  are  many  ways  of  struggling  for  existence  without  resorting 

39 


40 


ELEMENTARY  ECONOMICS 


Methods  of 

struggling 

FOR  Existence 


to  the  destructive  methods  of  brutes.    The  forms  of  conflict  or 
the  methods   of  struggling   for   existence   may   be   classified   as 

follows : 

'  War 
Robbery 
Destructive -i  Dueling 
Sabotage 
Brawling 
'  Thieving 
Swindling 
Deceptive-!  Adulteration  of  goods 
False  advertising 
^  Demagogy 

{Courting  for  royal  favor 
Courting  the  sovereign  people 
Campaigning  for  office 


Persuasive  - 


_      .    f  Polite  social  intercourse 
Erotics 

LCourtmg  the  opposite  sex 


Commercial  - 


Productive 


Advertising 
Salesmanship 
.  .  ,  f"  Leaving  it  to  the  crowd  " 
I  Litigation  before  the  courts 
Rivalry  in  producing  goods 
Rivalry  in  rendering  service 


Various  forms  of  conflict.  The  methods  named  in  the  fore- 
going outline  may  be  explained  and  illustrated  as  follows :  By 
destructive  methods  are  meant  all  those  whereby  one  succeeds  by 
virtue  of  one's  power  to  kill,  to  hurt,  or  to  inspire  fear  of  physical 
injury  or  pain.  "War,"  "robbery,"  "dueling,"  "sabotage,"  and 
"brawling"  are  names  for  methods  of  destruction  as  carried  on 
by  human  beings.  By  the  persuasive  methods  are  meant  all  those 
methods  whereby  one  succeeds  by  virtue  of  one's  power  to  persuade 
or  to  convince.  One  may  beat  one's  rival  by  being  a  more  per- 
suasive talker,  whether  one  is  striving  for  favors  from  the  sovereign 
person  or  from  the  sovereign  people,  whether  one  is  striving  for 
the  hand  of  a  lady,  the  decision  of  a  jury,  or  the  trade  of  a  pos- 
sible customer.    By  the  productive  methods  are  meant  all  those 


COMPETITION  41 

methods  whereby  one  may  beat  one's  rivals  or  gain  advantages 
by  virtue  of  one's  power  to  produce,  to  serve,  or  to  confer  benefit. 

The  same  persons  may  resort  to  more  than  one  of  these  methods 
in  order  to  gain  an  advantage.  When  two  farmers  compete  in 
growing  crops  they  are  struggling  for  existence,  or  for  economic 
advantage,  by  a  productive  method.  WTien  they  quarrel  over  a 
line  fence  and  take  their  quarrel  before  a  court  for  settlement  they 
are  struggling  by  a  persuasive  method.  When  they  secretly  alter 
or  remove  landmarks  in  order  to  gain  an  advantage  in  their  litiga- 
tion, or  when  they  bribe  jurors,  they  are  struggling  by  a  deceptive 
method.  When  they  fall  to  fighting  either  with  fists  or  with 
weapons  they  are  struggling  by  a  destructive  method. 

WTien  they  change  their  methods  in  the  order  just  described, 
they  are  sinking  lower  and  lower  in  the  scale ;  that  is,  they  are 
resorting  to  worse  and  worse  methods  of  struggling  for  existence 
or  advantage.  When  they  rival  one  another  in  growing  corn,  there 
is  more  corn  grown  as  the  result  of  that  rivalry.  The  country  is 
better  fed  and  everyone  is  better  off,  except  possibly  fhe  one  who 
is  beaten,  and  even  he  may  very  likely  be  better  off  than  he  would 
have  been  if  he  had  not  competed  at  all.  WTien  two  farmers  quar- 
rel over  a  line  fence  and  take  it  into  court,  no  one  gains  any 
benefit  except  the  lawyers,  and  what  the  lawyers  gain  the  farmers 
lose.  No  new  land  is  created  by  that  conflict.  No  new  wealth  is 
produced.  The  community  is  no  better  fed,  and  the  farmers  have 
wasted  their  time.  To  change  from  persuasion  to  deception  or 
from  deception  to  physical  force  is  so  clearly  to  sink  to  a  lower 
level  that  it  is  unnecessary  to  pursue  the  topic  farther. 

Destructive  and  deceptive  methods  of  brutes.  It  will  be 
apparent  to  anyone  who  will  study  the  diagram  on  page  40  that 
among  animals  the  destructive  and  deceptive  methods  are  the 
characteristic  forms  of  struggle.  They  kill,  maim,  injure,  rob,  and 
deceive  one  another  with  no  moral  or  legal  restraints.  They  may 
sometimes  rise  to  the  level  of  persuasion,  as  in  the  courting  process, 
but  never  to  the  level  of  production  :  that  is,  no  animal  ever  tries 
to  beat  its  rival  by  producing  a  larger  or  better  product  or 
rendering  a  greater  or  better  service. 


42  ELEMENTARY  ECONOMICS 

Among  human  beings  who  have  no  moral  sense  and  who  are 
unrestrained  by  law  and  justice  the  destructive  and  deceptive 
methods  of  struggle  will  be  followed  as  well  as  the  persuasive  and 
productive  methods,  but  the  destructive  and  deceptive  methods 
are  precisely  the  things  that  morals  and  laws  are  designed  to  pre- 
vent. In  any  civilization  worthy  of  the  name  and  under  any  gov- 
ernment worthy  to  stand  overnight,  men  are  actually  restrained 
by  their  own  moral  feelings,  by  the  respect  for  the  good  opinions 
of  their  fellows,  and  by  the  fear  of  legal  penalties  from  attempting 
to  promote  their  own  interests  by  destruction  or  deception. 

Meaning  of  crime.  To  say  that  men  are  restrained  from  doing 
these  things  is  not  the  same  as  to  say  that  they  are  absolutely  pre- 
vented. '"Crime"  is  the  name  we  give  to  destructive  and  deceptive 
methods  of  struggling,  and  it  still  flourishes,  though  the  government 
is  trying  to  stop  it.  We  are  trying  to  raise  the  struggle  for  existence 
to  a  higher  plane  than  that  on  which  it  is  waged  in  the  subhuman 
world.  The  aim  is  to  prevent  destruction  and  deception  and  to 
compel  men  to  succeed,  if  they  succeed  at  all,  by  persuasion  or 
production.  There  are,  however,  some  more  or  less  refined  methods 
of  deception  which  have  not  even  been  declared  illegal  by  legis- 
lation. If  we  can  so  improve  our  legislation  as  to  prohibit  every 
form  of  deception  as  well  as  destruction,  and  if  we  can  so  improve 
our  executive  and  judicial  systems  as  to  prevent  absolutely  the 
violation  of  law,  we  shall  have  reached  the  ideal  of  government 
control  over  the  struggle  for  existence. 

Is  it  wrong  to  compete  ?  There  are  a  few  people  who  object 
on  principle  to  all  forms  of  competition,  who  believe  that  the 
whole  competitive  system  is  morally  wrong.  This  feeling,  however, 
is  probably  due  to  a  failure  to  discriminate,  as  we  have  tried  to 
do  in  the  preceding  pages,  between  different  kinds  of  conflict. 
The  horrors  of  war  and  other  forms  of  destructive  conflict,  the 
petty,  skulking  meanness  which  accompanies  all  forms  of  decep- 
tive conflict,  and  even  the  jealousies  and  heartburnings  which 
result  from  many  forms  of  persuasive  conflict  have  so  impressed 
certain  sensitive  spirits  as  to  cause  them  to  revolt  against  the 
very  idea  of  competition  in  any  form.    Such  people  ought  never 


COMPETITION  43 

to  play  croquet,  because  there  is  competition  even  there.  An 
election,  moreover,  is  as  truly  competitive  as  any  form  of  business. 

Universality  of  struggle.  During  the  entire  life  of  man  on 
this  planet  he  has  had  to  struggle  in  one  way  or  another  against 
a  multitude  of  enemies,  human  and  nonhuman.  The  reason  why 
we  are  here  today  is  because  our  ancestors  were  successful  in  their 
struggles.  They  succeeded  in  living  and  reproducing  their  kind 
in  spite  of  all  the  enemies  and  dangers  which  surrounded  them. 
One  reason  why  they  struggled  so  successfully  was  that  they  were 
valiant  enough  to  wage  their  fight  with  vigor  and  with  spirit.  That 
spirit  we  have  inherited  to  such  an  extent  that  we  cannot  even 
amuse  ourselves  without  some  kind  of  competition  or  struggle. 
That  is  why  most  of  our  games  are  competitive.  Competition  is 
as  the  breath  of  life  to  our  nostrils.  It  will  be  well  for  us  if  we 
can  harness  this  spirit  to  productive  work  rather  than  allow  it  to 
waste  itself  in  destruction,  deception,  or  even  in  some  fruitless 
kinds  of  persuasion.  The  nation  which  succeeds  best  in  harnessing 
this  spirit  to  production  is  the  nation  which  should  normally  grow 
rapidly  in  wealth,  prosperity,  and  power. 

The  spirit  in  which  one  competes.  In  assuming  the  universal- 
ity and  permanence  of  competition  in  some  form  it  is  not  necessary- 
to  exclude  such  things  as  love,  friendship,  neighborliness,  and 
cooperation.  Competitors  in  a  friendly  game  may  be  none  the 
less  friendly  because  they  are  competing.  It  is  only  when  they 
care  more  for  victory  or  the  prize  of  victory  than  they  do  for 
friendship  that  competition  interferes  with  friendship.  This  can 
be  cured,  however,  not  by  abolishing  competition  but  by  learning 
to  care  for  the  right  things  and  to  evaluate  them  properly. 

\\Tien  men  care  more  for  money,  which  is  the  immediate  prize 
of  economic  competition,  than  for  honor,  friendship,  or  justice, 
then  competition  is  likely  to  be  ruthless  and  destructive.  When  men 
care  more  for  offices,  the  immediate  prizes  of  political  competition, 
than  for  the  welfare  of  the  country  or  the  peace  of  the  neighbor- 
hood, a  political  campaign  is  likely  to  become  a  ruthless  and  de- 
structive game.  And  when  football  men  care  more  for  victory  than 
for  sport  or  honor,  football  becomes  a  game  unfit  for  gentlemen. 


44  ELEMENTARY  ECONOMICS 

In  all  these  cases  the  evil  is  not  in  competition  itself  buMn  the 
false  syst«fi~ot^valuations_jn^the  minds  of  the  xompetitors.  So 
long  as  business  men  realize  that  there  are  other  things  more  pre- 
cious than  money,  so  long  as  politicians  realize  that  there  are 
other  things  more  important  than  winning  offices,  so  long  as  foot- 
ball men  realize  that  there  are  other  things  greater  than  victory, 
all  these  forms  of  competition  are  thoroughly  compatible  with 
the  most  sincere  friendship. 

We  must  conclude,  therefore,  that  there  is  nothing  wrong  in 
competition  in  itself,  otherwise  most  games  would  have  to  be  con- 
demned. It  is  wrong  and  uneconomical,  however,  to  try  to  gain 
one's  ends  by  destructive  or  decq)tive  methods.  Moreover,  to  do 
so  is  contrary  to  law.  We  are  permitted  by  law  to  compete  by 
the  methods  of  persuasion  and  production.  It  is  especially 
economical  for  everyone  to  compete  in  production  or  in  the 
performance  of  service.  The  more  universally  our  people  com- 
pete in  production,  and  the  more  strenuously  they  compete,  the 
more  production  and  the  better  service  we  shall  have  and  the 
better  off  everybody  will  be.  Competitive  bargaining,  which  is  a 
kind  of  persuasion,  sometimes  works  well  and  sometimes  badly. 
It  works  badly,  however,  mainly  when  someone  has  a  great  ad- 
vantage over  another  in  the  bargaining  process.  WTien  the  advan- 
tages are  equalized  even  competitive  bargaining  usually  works 
well,  unless  it  begins  to  verge  on  deception. 

EXERCISES    ^  ^^.  U/  .--^^ 

1.  What  is  meant  by  competition  ^it^'^•^«-^<'-^"^  *^  <»a-.'H*_. 

2.  Why  do  we  compete  ?  "^  (^^^^-^  -</  ^^;^^ 

'T)^        xl^'  ^^^^  ^^  meant  by  destructive  methods  of  struggling  for  exist- 
^fj^  4f^T&nte  ?    Are  such  methods  legal  among  civilized  men  ?  ^o 

4.  What  is  meant  by  deceptive  methods  ?* '^^"n^^'~TjIIluevc^ 

5.  What  is  meaHt  by  persuasive  methods  ?  Are  such  methods  legal 
among  civilized  men  ^  Ought  they  to  be?^l-r«AA?iw  "^^2"""""'^ 

^u-/*'^"***^  6.  What  is  meant  by  productive  methods  ?    Are  such  methods  legal 
■r»-^-_^among  civilized  men^i«^ught  they  to  be^  .^.-^.A*^ 

^^^Je^  7.  What,  if  any,  of  the  above  methods  do  you  approve?   Why? 

8.  Does  the  spirit  in  which  one  competes  make  any  difference^-— 


rt 


CHAPTER  VI 

COOPERATION 

Prevalence  of  cooperation.  In  the  midst  of  all  the  competition 
that  is  going  on  there  is  a  great  deal  of  cooperation.  That  is  true 
even  of  the  brutes  in  their  brutal  struggle  for  existence.  There  is 
much  mutual  aid,  much  working  together  for  a  common  end,  es- 
pecially among  the  gregarious  animals.  They  will  unite  for  mutual 
defense  or  mutual  attack,  they  will  play  together,  though  much  of 
their  play  takes  the  form  of  practice  for  attack  or  defense,  and 
they  frequently  act  in  unison  through  sheer  friendliness  with  no 
apparent  competitive  or  warlike  purpose.  All  this  is  true  in  still 
greater  degree  of  human  beings,  especially  the  more  civilized. 

Meaning  of  cooperation.  Cooperation  may  be  defined  as 
consciously  working J:Qgetherior  a  common  end.  When  a  number 
of  persons  work  consciously  together  to  accomplish  a  given  pui- 
pose,  with  no  element  of  personal  rivalry,  or,  if  it  exists,  with  the 
element  of  personal  rivalry  kept  out  of  sight,  there  is  said  to  be 
cooperation.  This  is  a  way  of  doing  things  which  must  be  taken 
account  of  in  any  general  stud}^  of  the  conditions  of  national  pros- 
perity. It  has  many  advantages,  but  it  is  by  no  means  so  general 
as  competition. 

Cooperation  a  form  of  competition.  Cooperation,  as  it  is  gen- 
erally practiced,  is  only  a  method  of  competing  more  effectively. 
There  is  cooperation  among  the  members  of  an  athletic  team. 
Their  teamwork  consists  in  working  together  smoothly  and  ef- 
fectively, but  the  purpose  of  this  teamwork,  or  cooperation,  is  to 
enable  them  to  compete  more  effectively  against  the  opposing  team. 
It  would  be  difficult  to  find  or  to  name  an  instance  of  cooperation 
which  did  not,  directly  or  indirectly,  enable  the  cooperators  to 
compete  more  successfully  than  they  were  able  to  do  when  work- 
ing alone  as  individuals.    Cooperation  in  business  is  really  the 

45 


46  ELEMENTARY  ECONOMICS 

principle  of  teamwork  applied  to  business  competition.  Within  the 
cooperating  group,  as  within  the  athletic  team,  competition  among 
members  is  reduced.  But  competition  between  cooperating  groups, 
or  between  the  group  and  those  outside  the  group,  is  quite  as 
sharp  as  it  would  be  if  there  were  no  cooperative  groups.  Again, 
when  a  cooperative  group  becomes  large  there  arises  within  the 
group  a  certain  amount  of  competition  for  offices  and  other 
advantages. 

Cooperation  is  an  excellent  thing  under  certain  conditions,  and 
wherever  the  conditions  call  for  it  every  reasonable  effort  should 
be  made  to  encourage  it ;  but  the  encouragement  should  be  given 
with  a  full  understanding  of  its  limitations  and  of  its  real  relation 
to  the  competitive  process.  More  cooperative  societies  have  failed 
than  have  succeeded.  One  of  the  principal  reasons  for  failure  has 
been  that  the  promoters  have  imagined  that  there  was  in  coopera- 
tion something  inherently  superior  to  competition  and  that  it 
ought  to  be  substituted  for  competition  anywhere  and  everywhere. 
The  truth  seems  to  be  that  cooperation  is  called  for  only  under 
certain  special  conditions  where  teamwork  is  required  in  order  to 
secure  large  results. 

Where  cooperation  is  successful.  A  careful  study  of  co- 
operation will  show  that  it  has  seldom  succeeded  in  the  field  of 
production.  Its  chief  successes  have  been  achieved  in  merchandis- 
ing ;  that  is,  in  buying  and  selling.  Except  among  a  few  religious 
societies,  which  are  held  together  by  a  powerful  religious  senti- 
ment, the  author  does  not  know  of  a  single  case  where  cooperative 
farming  has  succeeded.  By  cooperative  farming  is  meant  the  run- 
ning of  the  productive  work  of  growing  crops  under  a  cooperative 
system.  There  are  many  cases,  however,  in  which  groups  of 
farmers  have  cooperated  in  buying  and  selling,  in  marketing  their 
products,  in  purchasing  their  supplies,  and  in  securing  capital  on 
advantageous  terms.  There  are  also  many  cases  in  which  they 
have  cooperated  in  running  creameries,  cheese  factories,  and 
grain  elevators.  These  are  parts  of  their  marketing  system.  Again, 
it  must  be  remembered  that  the  farmers  do  not  themselves  operate 
these  establishments.    They  own  them  and  they  furnish  the  capital 


co6pefl\tion  47 

to  run  them,  but  they  hire  others  to  manage  them  and  to  do  the 
work.  The  men  who  work  in  these  establishments  are  not  co- 
operators,  but  receive  wages  and  salaries  precisely  as  they  would 
if  the  establishments  were  owned  by  private  individuals. 

Two  fields  of  business  competition.  There  is  a  fundamental 
reason  why  cooperative  enterprises  have  not  flourished  in  the 
field  of  production  as  often  as  they  have  in  the  field  of  buying 
and  selling.  This  reason  is  found  in  the  two  kinds  of  business 
competition, — competitive  production  and  competitive  bargaining. 
Competitive  production  means  rivalry  to  see  who  can  produce  the 
largest  and  the  best  product ;  competitive  bargaining  means  trying 
to  get  the  better  of  a  bargain.  Competitive  production  always 
works  well ;  competitive  bargaining  sometimes  works  well  and 
sometimes  badly.  Since  competitive  production  always  works  well, 
there  is  no  advantage  in  changing  to  cooperative  production.  No 
one  has  a  sufficiently  strong  motive  to  induce  him  to  give  his  time 
and  energ}-  to  the  running  of  a  cooperative  society  in  the  field  of 
production.  Since  there  are  no  evils  connected  with  competitive 
production,  there  is  not  enough  to  be  gained  by  cooperative  pro- 
duction to  lead  anyone  to  sacrifice  his  time  and  effort  in  order  to 
make  it  succeed. 

In  the  field  of  competitive  bargaining,  however,  evils  frequently 
spring  up.  \\'here  a  small  and  compact  body  of  dealers  are  buying 
from  a  large  and  widely  scattered  body  of  producers  the  latter  are 
at  a  great  disadvantage  in  the  bargaining  process.  Where  this  is 
the  case  it  is  necessarv'  for  the  producers  to  get  together  in  a 
cooperative  organization  in  order  to  bargain  on  equal  terms  with 
the  dealers.  Where  there  is  such  a  need  as  this  someone  may  have 
a  motive  that  is  sufficiently  strong  to  induce  him  to  give  his  time 
and  attention,  to  sit  up  nights,  to  labor  in  season  and  out  of 
season,  to  keep  the  cooperative  society  together  and  make  it  suc- 
ceed. Without  some  such  motive  as  this,  cooperation  has  seldom 
or  never  succeeded. 

Competitive  consumption.  There  is  another  kind  of  competi- 
tion which  always  works  badly.  It  is  even  worse  than  competi- 
tive bargaining.    It  may  be  called  competitive  consumption.    By 


48  ELEMENTARY  ECONOMICS 

competitive  consumption  is  meant  a  rivalry  in  display,  in  ostenta- 
tion, in  the  effort  to  outshine  or  to  outdress  all  one's  neighbors  or 
at  least  not  to  be  outshone  or  outdressed  by  them.  This  is  not 
business  competition,  however,  though  it  can  be  called  a  kind  of 
economic  competition. 

Various  forms  of  economic  competition.  From  what  has  been 
said  it  will  appear  that  economic  competition  is  not  synonymous 
with  the  productive  methods  of  struggling  for  existence  as  out- 
lined in  the  beginning  of  the  preceding  chapter.  There  is  such 
a  thing,  it  is  true,  as  competitive  production,  but  competitive  bar- 
gaining is  partly  persuasive  and  partly  deceptive.  It  is  persuasive 
when  it  takes  the  form  of  clever  advertising,  of  expert  salesman- 
ship, or  of  shrewd  and  reasonably  honest  bargaining  ;  it  is  decep- 
tive when  cleverness  in  advertising  takes  the  form  of  artistic  lying 
(of  overstating  the  merits  of  an  article  advertised)  or  when  expert 
salesmanship  takes  the  same  form. 

Competitive  consumption  has  no  productive  features  about  it. 
The  effort  to  keep  up  appearances,  to  dress  better  than  one  can 
afford,  to  spend  money  for  purposes  of  display,  are  all  deceptive, 
besides  being  wasteful  and  to  that  extent  destructive.  These, 
however,  are  among  the  more  refined  and  less  repulsive  forms  of 
destruction.  For  this  reason,  perhaps,  neither  law  nor  public 
sentiment  has  condemned  them  very  definitely  as  yet. 

In  what  fields  cooperation  may  succeed.  They  who  are  in- 
terested in  promoting  cooperation  should  bear  all  this  in  mind. 
It  is  a  waste  of  time  and  energy  to  try  to  substitute  cooperation 
for  competition  in  all  cases.  In  the  first  place,  it  cannot  be  done, 
because  so  long  as  people  show  a  preference  for  themselves  and 
those  who  are  near  them,  as  against  others  who  are  farther  from 
them,  competition  in  some  form  will  exist.  In  the  second  place, 
even  if  cooperation  could  be  substituted  for  competition,  it  would 
be  undesirable  in  many  cases,  though  desirable  in  others.  That 
is  to  say,  there  are  some  cases  in  which  competition  works  so  well 
that  cooperation  could  not  improve  upon  it.  To  be  more  specific, 
competitive  production,  as  stated  before,  alwa3's  works  well.  No 
one  has  yet  succeeded  in  making  cooperation  in  production,  either 


COOPERATION  49 

on  a  large  scale  or  on  a  small  scale,  work  successfully  for  a  long 
period  of  time. 

This  is  not  saying  that  producers  may  not  occasionally  co- 
operate, as  when  farmers  help  one  another  in  special  lines  of 
work.  In  our  rural  communities,  especially  in  previous  generations, 
there  were  many  barn  raisings,  log  rollings,  corn  huskings,  and 
other  examples  of  genuine  and  beneficial  cooperation.  But  these 
events  were  only  incidents  in  a  kind  of  life  which  remained,  in 
spite  of  them,  predominantly  competitive. 

Even  competitive  bargaining  sometimes  works  well.  Where 
this  is  the  case  nothing  is  to  be  gained  by  cooperation,  and  it  is 
therefore  certain  to  fail,  because  the  cooperators  will  sooner  or 
later  lose  their  enthusiasm  when  they  see  that  they  are  not  gaining 
anything  by  it ;  that  is,  when  they  see  that  it  is  not  working  any 
better  than  competition.  The  would-be  cooperators  should  choose 
for  their  field  of  effort  some  situation  where  competitive  bargaining 
is  working  badly.  There  they  will  have  a  chance  of  success.  But 
no  cooperative  scheme  runs  itself.  Even  where  there  is  a  distinct 
and  undoubted  need  for  it,  it  will  succeed  only  when  some  capable 
person  gives  a  great  deal  of  time  and  study  and  hard  work  to  it. 

Compulsion  versus  voluntary  agreement.  With  an  unerring 
instinct  for  economic  error  a  certain  class  of  writers  have  per- 
sistently obscured  this  question  of  cooperation  versus  competition 
by  confusing  it  with  the  question  of  working  under  compulsion 
versus  working  under  freedom  of  contract.  The  Panama  Canal  was 
not  built  cooperatively.  The  government  of  the  United  States 
decided  to  hire  others  to  do  it  instead  of  bargaining  with  con- 
tractors. All  who  did  the  work  did  not  cooperate,  any  more  than 
the  men  who  build  our  railroads  and  factories  or  work  on  our 
streets.  If  a  large  number  of  farmers  unite  to  run  a  creamery  or 
a  shoe  factory  of  their  own,  but  do  not  work  in  it  themselves,  they 
sometimes  call  it  a  cooperative  creamery  or  shoe  factory.  In 
reality  it  is  only  quasi  cooperative.  The  people  who  do  the  work 
in  the  factory  are  hired  and  have  no  more  to  say  about  the  man- 
agement than  they  would  have  if  the  factory  were  owned  by  an 
ordinary  joint-stock  corporation. 


50  ELEMENTARY  ECONOMICS 

A  cooperative  shoe  factory,  of  the  class  which  we  are  now  dis- 
cussing, is  merely  an  organization  of  consumers  formed  for  the 
purpose  of  bargaining  for  shoes  for  its  individual  members  more 
successfully  than  they  could  do  individually.  It  finds  that  it  can 
bargain  directly  with  workingmen,  tanneries,  and  others  to  better 
advantage  than  it  can  bargain  with  private  owners. 

Cooperation  in  setting  standards  of  consumption.  There  is 
always  an  acute  need  for  a  kind  of  cooperation  that  can  stop 
competitive  consumption.  Unfortunately  that  need  is  not  very 
widely  understood.  One  reason  why  it  costs  us  so  much  to  live 
is  that  we  are  always  trying  to  keep  up  with  someone  else. 
"It  takes  all  my  income,"  said  a  certain  congressman,  "to  keep 
up  with  my  fool  neighbors."  He  was  expressing  in  this  picturesque 
manner  one  of  the  profound  facts  of  our  economic  life.^  The 
things  which  cost  us  so  much  money  are  not  the  things  which  we 
prize  for  their  own  sakes,  but  the  things  which  we  feel  that 
we  must  have  because  our  neighbors  have  them.  The  indi- 
vidual finds  himself  almost  helpless.  "As  well  be  out  of  the 
world  as  out  of  style  "  is  a  saying  which  pretty  well  sums  up  the 
situation  so  far  as  the  individual  is  concerned.  But  a  large  group 
of  people  who  would  cooperate  in  the  work  of  setting  their  own 
styles  need  not  be  either  out  of  style  or  out  of  the  world.  Edu- 
cated people  who  understand  this  principle  should  take  the  lead. 
In  so  doing  they  would  not  only  be  doing  themselves  a  favor,  but 
they  would  be  conferring  a  priceless  benefit  upon  the  whole  nation. 

EXERCISES        ^     .t-jX'Cti^/^'"''''"'''"^^^ 

1.  What  is  cooperation  ?c+-,-v*..,rv-»l-»*'^*^2^  ^ 

2.  How  is  it  related  to  competition  ?« 

3.  Is  it  inherently  better  than  competftloi 

4.  Is  it  always  successful? '^^  .   i-^aw^ 
TX-*~    5.  Under  what  conditions  is  it  most  likely  to  succeed?      '^         . 

/      7.  What  is  meant  by  competitive  consumption^  /Vyvi^     ^ — 

^  Compare  also  Irving  Bacheller's  book  entitled  "  Keeping  up  with  Lizzie." 


CHAPTER  VH 
LAW  AND  GOVERNIVIENT 

The  need  for  law.  One  of  the  most  important  of  the  things 
which  the  people  do  in  order  to  achieve  prosperity  is  to  maintain 
a  government  to  make  and  enforce  law.  Law  and  government  have 
a  most  important  part  to  perform  in  promoting  the  prosperity  of 
the  people.  Bagehot^  has  said  that  the  first  great  need  of  primi- 
tive man  is  for  law, —  definite,  concise  law.  He  even  argued  that 
it  is  more  important  that  the  law  be  definite  and  concise  than 
that  it  be  just,  though  both  are  of  very  great  importance. 

It  is  probable  that  a  system  of  laws  which  are  well  understood 
because  they  are  clear  and  concise  and  which  are  regularly  en- 
forced without  variation  or  favoritism,  even  though  they  are  in 
some  respects  unjust,  is  better  for  a  people  than  a  system  of  laws 
which  are  in  essence  just,  but  which  are  not  clearly  understood 
and  not  regularly  and  impartially  enforced.  When  everyone  knows 
definitely  what  the  law  is,  and  knows  definitely  that  it  will  be  en- 
forced not  only  against  him  but  equally  in  his  defense,  he  at  least 
knows  what  he  can  count  upon.  Nothing  so  discourages  industry 
and  enterprise  as  uncertainty  as  to  what  other  men  are  likely 
to  do,  and  uncertainty  as  to  what  government  officials  will  do  is 
one  of  the  worst  forms  of  uncertainty,  ^\^len  a  legal  regulation  is 
universally  and  accurately  enforced  it  begins  to  work  like  a  law 
of  nature.  We  never  care  to  inquire  whether  the  law  of  gravita- 
tion is  just  or  not.  We  know  that  it  is  unavoidable  and  calculable, 
and  therefore  we  manage  to  adjust  ourselves  to  it  most  of  the 
time. 

The  problem  as  to  what  the  government  can  do,  through  its 
laws  and  its  administration,  for  the  promotion  of  the  economic 

1  "Physics  and  Politics"  (fifth  edition),  p.  21.    London,  1879. 
SI 


52  ELEMENTARY  ECONOMICS 

prosperity  of  the  people  is  of  the  very  greatest  importance.  The 
specific  aim  should  be  to  call  out  the  very  best  and  most  productive 
efforts  of  every  individual.  Since  the  greatest  resource  of  any 
natiori  is  the  productive  energy  of  the  people  themselves,  it  fol- 
lows that  the  conservation  and  development  of  that  productive 
energy  is  the  most  constructive  policy  that  any  government  can 
pursue.  It  also  follows  that  the  worst  form  of  waste  that  any 
government  could  permit  or  encourage  would  be  the  waste  of  the 
productive  energy  of  the  people. 

The  repression  of  destructive  and  deceptive  action.  The 
first  and  most  obvious  thing  which  the  government  must  do  is  to 
prohibit  and  prevent  all  the  destructive  and  deceptive  forms  of 
conflict  as  outlined  in  Chapter  V.  He  who  has  no  moral  scruples 
against  pursuing  his  selfish  interests  by  destructive  or  deceptive 
methods  can  be  restrained  only  by  the  superior  force  of  the  many 
as  it  is  exercised  through  the  government.  If  he  is  allowed  to 
pursue  his  selfish  interests  by  these  methods,  he  not  only  wastes 
his  own  powers  in  unproductive  efforts  but  also  tends  to  destroy 
the  products  of  other  people,  and,  what  is  more  important,  he 
discourages  them  from  further  productive  effort  and  thus  causes 
their  productive  powers  to  go  to  waste.  It  may  therefore  be  said 
that,  whatever  other  functions  government  may  have,  its  primary 
function  is  to  repress  the  destructive  and  deceptive  methods  of 
pursuing  self-interest. 

The  repression  of  violence  and  fraud.  The  first  effect  of  this 
repression  of  the  destructive  and  deceptive  methods  is  to  transform 
the  struggle  for  self-interest  from  the  brutal  struggle  for  existence, 
where  the  strong  prey  upon  the  weak  and  the  ferocious  upon  the 
gentle,  into  a  struggle  wherein  the  persuasive  and  the  productive 
triumph  over  the  unpersuasive  and  the  unproductive.  In  so  far  as 
competition  can  be  made  a  rivalry  in  production,  and  success  can 
be  made  to  depend  upon  production,  we  shall  be  approaching  a 
condition  in  which  each  and  every  one  would  succeed  in  getting 
what  he  wanted  in  exact  proportion  as  he  contributed  to  others 
what  they  wanted  ;  under  which  the  most  useful  would  be  the  most 
successful,  and  the  indispensable  man  would  be  the  great  man.    In 


LAW  AND  GOVERNMENT  53 

that  situation  we  should  have  a  literal  fulfillment  of  the  words 
'^  Whosoever  will  be  chief  among  you,  let.  him  be  your  servant." 
And  a  servant  is  not  necessarily  one  who  comes  at  your  beck  and 
call  to  do  your  bidding ;  he  may  be  merely  the  one  who  does  you 
a  service  or  who  produces  what  you  need. 

It  must  not  be  hastily  assumed  that  the  repression  by  the  gov- 
ernment of  the  destructive  and  deceptive  methods  of  acquiring 
possession  of  desirable  things  is  merely  negative  work.  By  this 
kind  of  repression  every  producer  is  protected  in  the  possession 
and  enjoyment  of  the  fruits  of  his  own  productive  effort.  Know- 
ing that  he  will  enjoy  the  full  advantage  of  his  own  industry,  enter- 
prise, and  foresight,  he  will  have  the  strongest  kind  of  motive  for 
exercising  these  virtues  to  their  full  capacity.  This  lets  loose  the 
productive  energy  of  the  people  in  a  way  that  would  be  impossible 
without  the  protection  of  law  and  goverrmient.  The  people  can 
be  trusted  to  take  the  initiative  and  start  all  sorts  of  productive 
enterprises  if  they  are  thus  safeguarded. 

There  is  nothing  any  more  positive  and  constructive  than  the 
free  spirit  of  a  vigorous  race  of  people  when  they  are  left  to  direct 
themselves  in  the  field  of  production,  but  are  restrained  from 
entering  the  fields  of  destruction  and  deception.  They  can  safely 
be  intrusted  with  the  task  of  looking  after  themselves  if  those  who 
are  criminally  inclined  can  be  prevented  from  interfering  with 
them.  Give  the  people  confidence  in  the  government  and  in  one 
another,  and  their  own  productive  virtues  will  develop,  their 
industrial  power  will  multiply  itself,  and  the  prosperity  and  power 
of  the  nation  will  be  assured. 

Confidence  and  economy.  Confidence  is  one  of  the  greatest 
of  all  economizers  of  human  energy.  Its  greatest  value  is  not  in 
the  stability  which  it  brings  to  the  financial  market,  though  that 
is  very  important ;  it  is  found  rather  in  the  unshackling  of  enter- 
prise which  results  from  confidence  in  the  government  and  in  one's 
neighbors  and  fellow  citizens.  The  average  citizen  has  more  points 
of  contact  with  his  neighbors,  his  associates  in  business,  and  his 
fellow  citizens  than  with  the  government  or  the  financial  market. 
It  is  in  these  numerous  points  of  contact,  and  in  the  vast  sum  of 


54  ELEMENTARY  ECONOMICS 

these  dealings  of  man  with  man,  that  confidence  produces  its 
greatest  economies  and  lack  of  confidence  its  greatest  waste. 

Professor  E.  A.  Ross,  in  his  book  entitled  "The  Changing 
Chinese,"  mentions  certain  bad  neighborhoods  in  China  where  the 
farmer  must  guard  his  rice  field  every  night  to  keep  his  crop  from 
being  destroyed  or  stolen.  The  energy  that  is  wasted  when  so 
many  people  stay  awake  every  night  must  be  stupendous,  but  this 
waste  is  a  trifling  matter  compared  with  the  discouragement  and 
lack  of  enterprise  that  result  from  the  feeling  of  uncertainty  which 
such  lawless  conditions  beget.  We  save  much  energy  by  being 
able  to  sleep  at  night  in  confidence  that  the  products  of  our  labor 
will  not  disappear  before  morning. 

Before  we  expend  too  much  sympathy  on  those  Chinese  farmers 
we  should  consider  the  condition  of  the  fruit  growers,  gardeners, 
and  farmers  in  the  neighborhood  of  some  of  our  large  towns  who 
are  frequently  compelled  to  keep  a  watchman  or  else  to  expose  the 
entire  produce  of  their  toil  to  the  depredations  of  town  marauders. 
The  depredations  of  these  marauders  are  especially  disastrous  to 
the  family  garden,  where  the  owner  cannot  afford  to  hire  a  watch- 
man and  is  himself  engaged  in  other  work  which  makes  it  neces- 
sary for  him  to  sleep  at  night. 

Observance  of  law  a  patriotic  duty.  There  are  two  reasons 
for  choosing  the  orchardist  and  the  gardener  as  examples  of  pro- 
ducers who  gain  through  a  government  and  a  community  in  which 
they  have  confidence.  In  the  first  place,  it  is  obvious  that  these 
men  are  producers  who  contribute  certain  vital  necessities  to  the 
prosperity  and  well-being  of  the  whole  community.  In  the  second 
place,  it  ought  to  be  easy  for  the  average  person  to  understand 
that  any  act  of  his  which  makes  it  uncertain  as  to  whether  or 
not  the  producer  will  reap  the  reward  of  his  labor  is  an  injury  not 
only  to  the  producer  but  to  the  consumer  and  to  the  whole  nation 
as  well. 

Standardization  and  economy.  Aside  from  police  protection 
there  are  a  few  other  important  functions  which  law  and  govern- 
ment can  perform  better  than  private  individuals  or  voluntary 
groups  of  individuals.    One  of  the  most  important  of  these  is  the 


LAW  AND  GOVERNMENT  55 

standardizing  of  coins,  weights,  and  measures.  The  economy  in- 
volved in  transferring  coined  money  instead  of  uncoined  metal 
is  apparent.  Coining  the  metal  by  a  reliable  and  responsible 
government  merely  gives  the  public  confidence  in  its  weight  and 
fineness.  When  it  is  once  coined  it  can  pass  from  hand  to  hand 
without  the  labor  of  inspection  on  the  part  of  everyone  who  re- 
ceives it.  Otherwise  the  receiver  would  always  have  to  weigh  it 
to  determine  its  quantity  and  test  it  to  determine  its  quality. 
When  it  is  coined  it  "sells"  (if  we  may  speak  of  selling  money) 
on  grade  and  reputation  rather  than  on  inspection.  Confidence 
is  what  makes  it  sell  on  grade  and  reputation ;  lack  of  confidence 
would  necessitate  inspection,— that  is,  weighing  and  testing, — 
which  would  be  very  wasteful  of  time  and  labor. 

Any  other  commodity  may  also  sell  on  grade  and  reputation 
rather  than  on  inspection,  if  it  is  properly  standardized.  This 
also  would  be  economical  and,  as  in  the  case  of  coin,  would  be  a 
result  of  confidence.  All  civilized  governments  have  done  some- 
thing toward  standardizing  weights  and  measures  for  determining 
quantity.  In  proportion  as  these  standards  are  fixed  and  enforced 
by  law  we  save  time  and  energy  in  transferring  goods.  If  it  were 
possible  to  go  farther  and  fix  and  enforce  standards  of  quality  as 
well  as  of  quantity,  still  greater  economies  would  be  effected. 

Individuals  and  firms  have  frequently  succeeded  in  standardiz- 
ing their  goods,  both  as  to  quantity  and  as  to  quality,  so  effec- 
tively that  buyers  can  buy  on  grade  and  reputation  rather  than 
on  inspection.  Most  goods  which  are  put  up  in  standardized 
packages  and  always  sold  in  this  form  are  sold  on  grade  and  not 
on  inspection.  Whenever  individuals  and  firms  succeed  in  in- 
spiring such  a  degree  of  confidence  they  generally  increase  the 
salability  of  their  goods.  They  save  the  purchaser  some  time  and 
trouble,  and  he  is  usually  willing  to  pay  something  for  that  saving. 
Only  the  government,  however,  can  enforce  uniform  standards 
among  all  producers  and  all  dealers. 

Standardization  and  specialization.  WTien  each  individual 
can  avoid  the  necessity  of  being  expert  in  many  things,  and  there- 
fore has  time  to  become  a  specialist  in  one  thing,  the  general 


5 6  ELEMENTARY  ECONOMICS 

efficiency  of  the  whole  nation  is  increased.  One  of  the  advantages 
of  standardizing  commodities  is  that  the  average  consumer  can 
save  himself  the  trouble  of  being  an  expert  buyer  or  an  expert 
judge  of  the  many  things  which  he  has  to  purchase.  If  he  has 
confidence  not  only  in  the  weights  and  measures  but  also  in  the 
alleged  quality  of  the  goods  offered  for  sale,  he  may  make  his  pur- 
chases with  very  little  expenditure  of  time  and  strength  and  save 
his  time  and  strength  for  his  own  special  work. 

The  enforcement  of  contracts  and  agreements  is  another  way 
of  creating  confidence  and,  through  the  creation  of  confidence,  of 
economizing  energy  and  encouraging  production.  Where  men  com- 
monly regard  contracts  as  scraps  of  paper  and  do  not  solemnly 
and  completely  fulfill  them,  and  where  law  and  government  fail 
to  compel  their  literal  fulfillment,  there  will,  of  course,  be  great 
difficulty  in  working  together  in  productive  enterprises. 

The  exercise  of  authority.  It  is  clear,  therefore,  that  one 
very  important  function  of  government  is  to  create  that  state  of 
confidence  which  results  in  economy,  and  to  create  it,  first,  by 
repressing  destruction  and  deception  through  the  police  power  of 
the  state ;  second,  by  standardizing  products ;  and,  third,  by  en- 
forcing contracts.  These  tasks,  which  are  necessary  in  the  interest 
of  the  highest  economy,  are  thrown  upon  the  government  because 
no  other  agency  is  in  a  position  to  perform  them.  They  call  for 
the  exercise  of  authority,  backed  up  by  physical  force,  and  that  is 
a  work  which  can  be  intrusted  to  no  private  agency. 

We  need  not  limit  the  functions  of  government,  however,  to 
those  requiring  the  exercise  of  authority,  although  usually  it  will 
be  found  that  the  government  is  best  fitted  to  perform  those  which 
require  some  degree  of  authority,  whereas  private  individuals  and 
organizations  can  usually  be  intrusted  with  those  enterprises  which 
can  be  carried  out  wholly  on  the  basis  of  voluntary  agreement. 
This  distinction  is  not  always  clear,  but  a  little  careful  study  will 
usually  reveal  the  fact  that  there  is  an  element  of  compulsion  in 
those  enterprises  which  the  government  carries  on  most  suc- 
cessfully. However,  we  need  not  hold  to  any  hard-and-fast  defini- 
tion of  the  functions  of  government.    It  is  sufficient  to  say  that 


LAW  AND  GOVERNMENT  57 

anything  is  a  proper  task  for  the  government  if  there  is  reasonable 
grotihcl  for'Felieving  that  the  government  can  do  it  better  and 
more  economically  than  private  enterprise  can  reasonably  be  ex- 
pected to  do  it.  That  reasonable  ground  exists  in  favor  of  govern- 
ment enterprise  whenever  authority  or  compulsion  is  necessary  to 
its  successful  accomplishment.  \Mien  there  is  no  need  whatever 
for  compulsion — that  is,  when  every  part  of  the  work,  including 
the  selling  of  the  product,  can  be  conducted  on  the  voluntary 
basis  of  free  contract — the  general  tendency  is  to  leave  the  task 
to  private  enterprise. 

Beneficent  uses  of  power.  There  is  a  wide  difference,  however, 
between  using  force  to  compel  a  man  to  do  something  which  he 
has  voluntarily  contracted  to  do  and  using  it  to  compel  him  to  do 
something  which  he  has  never  agreed  to  do  and  would  prefer  not 
to  do.  As  a  matter  of  obser\'ation  it  will  be  found  that  most  if 
not  all  of  the  things  which  the  government  is  able  to  do  well  in- 
volve some  element  of  compulsion  of  the  latter  kind.  Public  edu- 
cation will  serve  as  an  example.  Wherever  it  is  a  success  there 
is  either  compulsory  attendance  or  compulsory  support  by  taxa- 
tion or  a  combination  of  both.  In  the  lower  grades  of  our  public- 
school  system  we  have  both.  In  the  higher  grades  and  in  our 
state  colleges  and  universities  we  have  compulsory  support ;  that 
is,  the  taxing  power  of  the  government  is  used  to  procure  the 
means  for  the  payment  of  expenses.  Both  compulsory  attendance 
upon  the  lower  grades  and  compulsory  support  of  all  grades  are 
beneficent  uses  of  the  physical  power  of  the  government  over  the 
individual ;  but  it  must  be  remembered  that  it  is  the  use  of 
physical  power.  There  is  no  reason  for  believing  that  a  govern- 
ment school  on  a  purely  voluntary  basis  would  be  superior  to  a 
private  school ;  that  is  to  say,  if  both  attendance  and  payment 
were  voluntary  on  the  part  of  individuals,  it  is  difficult  to  see  how 
it  could  be  more  successfully  managed  by  the  government  than 
by  some  private  agency. 

That  which  is  true  of  public  education  appears  to  be  true  of 
every  other  enterprise  upon  which  it  would  be  possible  for  the 
government  to  enter.    The  government  has  no  advantage  over  a 


58  ELEMENTARY  ECONOMICS 

private  individual  or  a  voluntary  association  of  individuals  except 
in  the_use_oLioF€eur~€ompulsion ;  that  is  to  say,  any  enterprise 
which  can  be  carried  on,  on  a  purely  voluntary  basis,  without  any 
use  of  compulsion  except  in  the  enforcement  of  contracts  which 
are  themselves  voluntarily  entered  into,  can  probably  be  fully  as 
well  managed  by  private  individuals  and  associations  as  by  the 
government ;  but  if  any  degree  of  compulsion  is  necessary  in 
order  to  insure  its  success,  it  becomes  a  subject  for  government 
enterprise.  There  is  undoubtedly  a  large  field  for  the  benefi- 
cent exercise  of  compulsion.  There  is  also  a  large  field  where 
freedom  and  voluntary  agreements  are  better  than  compulsion. 
If  we  can  locate  the  limits  of  the  beneficent  exercise  of  force 
we  shall  have  located  the  limits  to  the  beneficent  exercise  of 
government  enterprise. 

Human  interests  sometimes  in  conflict  and  sometimes  in 
harmony.  Human  interests  are  frequently  in  conflict  with  one 
another.  They  are  also  frequently  in  harmony  with  one  another. 
Where  they  are  in  conflict — that  is,  where  one  person's  interest 
conflicts  with  that  of  another — there  is  likely  to  be  trouble.  Only 
three  things  can  prevent  uneconomic  conflict;  that  is,  conflict 
which  is  either  destructive  or  deceptive.  The  first  is  the  voluntary 
submission  of  the  weaker  person  through  fear.  That  results  in 
despotism.  The  second  is  such  moral  self-restraint  on  the  part 
of  one  or  both  as  will  prevent  a  quarrel.  Willingness  to  give  up 
not  only  one's  coat  but  one's  cloak  also  would  preserve  peace.  The 
third  is  a  strong  and  effective  umpire  who  will  promptly  decide 
the  case  and  enforce  his  decision  upon  both  parties  to  the  conflict. 
This  umpire  is  the  government. 

It  will  generally  be  agreed,  except  by  extreme  anarchists,  that 
wherever  human  interests  come  in  conflict,  a  strong  umpire  of 
some  kind  will  be  necessary  until  men  are  so  self-restrained  by 
their  morals  or  their  religion  as  to  govern  themselves.  Without 
such  self-restraint  the  conflict  of  interests  will  result  in  the  wast- 
ing of  human  life  and  energy  by  destructive  combats,  fights,  and 
duels,  unless  there  is  a  government  at  hand  to  settle  the  difference 
and  send  the  disputants  about  their  business. 


LAW  AND  GOVERNMENT  59 

Government  control  unnecessary  where  human  interests  are 
in  harmony.  But  human  interests  are  sometimes  harmonious. 
When  this  is  the  case  the  individual  who  pursues  his  own  interest 
is  also  promoting  the  interest  of  others.  Within  this  field  where 
interests  are  in  harmony  it  is  true,  as  Adam  Smith  said  long  ago, 
that  we  are  sometimes  led  as  by  an  invisible  hand  to  promote 
the  public  interest  while  trying  to  promote  our  own.'  It  is  to  the 
interest  of  the  farmer  to  grow  good  crops ;  it  is  likewise  to  the 
interest  of  the  public  to  have  him  do  so.  In  this  and  a  vast 
multitude  of  other  cases  the  individual  needs  no  compulsion 
to  lead  him  to  promote  the  public  good.  In  all  such  cases  it 
seems  to  work  better  in  the  long  run  to  leave  the  individual  very 
much  to  himself.  The  wise  government  will  generally  keep  its 
hands  off. 

Tendency  of  government  officers  to  increase  their  own  power- 
and  importance.  There  is,  however,  a  natural  tendency  in  all 
human  beings  to  wish  to  magnify  their  own  power  and  importance. 
This  tendency  seems  to  be  peculiarly  strong  in  that  kind  of 
person  who  manages  to  get  elected  to  public  office.  Modesty  is 
not  the  outstanding  characteristic  of  the  average  candidate  who 
seeks  office,  though  he  may  feign  it  pretty  well.  The  more  the 
government  undertakes,  the  greater  becomes  the  power  and  im- 
portance of  the  officeholder.  There  is,  therefore,  a  strong  tendency 
on  the  part  of  all  officeholders  to  extend  the  functions  of  govern- 
ment. The  arguments  in  favor  of  this  policy,  as  used  by  the 
elected,  are  sometimes  so  subtle  as  to  deceive  the  very  elect.  They 
are  always  made  as  though  in  the  interest  of  the  people,  though 
they  are  really  in  the  interest  of  the  officeholding  class.  It  is  a 
means  of  exalting  the  position  of  the  vote  getter.  It  therefore  be- 
hooves the  average  citizen  who  has  no  ambition  for  public  office  to 

^  He  generally,  indeed,  neither  intends  to  promote  the  public  interest,  nor 
knows  how  much  he  is  promoting  it.  .  .  .  By  directing  his  industry  in  such 
a  manner  as  its  produce  may  be  of  greatest  value,  he  intends  only  his  own 
gain,  and  he  is  in  this,  as  in  many  other  cases,  led  by  an  invisible  hand  to 
promote  an  end  which  was  no  part  of  his  intention.  .  .  .  By  pursuing  his  own 
interest  he  frequently  promotes  that  of  society  more  effectually  than  when  he 
really  intends  to  promote  it.  — ^ "  Wealth  of  Nations,"  Book  IV,  chap,  ii 


6o  ELEMENTARY  ECONOMICS 

study  very  critically  all  arguments  favoring  the  extension  of  the 
functions  of  the  government. 

The  incompetent.  There  is,  however,  the  problem  of  the  people 
who  are  not  competent  to  pursue  intelligently  either  their  own 
interest  or  the  public  interest.  The  feeble-minded,  the  insane,  and 
the  immature  who  have  no  natural  guardians  must  of  course  have 
their  interests  looked  after  and  cared  for  by  the  government.  With 
them  it  is  not  a  question  of  the  conflict  or  harmony  of  their 
interests  with  those  of  the  public ;  it  is  a  question  of  their 
competence  to  pursue  even  their  own  interests  intelligently. 

The  individual's  wisdom  is  not  increased  suddenly  when  he 
is  put  into  public  office.  Is  anyone  really  competent  to  pursue 
his  own  interest  intelligently?  This  question  is  sometimes  asked 
by  those  who  think  that  the  government  should  look  after  us  all. 
The  statement  that  men  are  not  competent  to  pursue  their  own 
interests  does  not  furnish  a  very  convincing  argument  in  favor 
of  general  care  and  supervision  by  the  government,  for  the  rea- 
son that  it  goes  too  far.  If  no  one  is  competent  to  look  after  his 
own  interests,  how  can  he  possibly  be  competent  to  look  after  the 
interests  of  the  rest  of  mankind?  The  officeholder  is  merely  a 
man  or  a  woman  like  the  rest  of  us.  If  we  are  not  able  to  look 
after  ourselves,  neither  is  he  nor  she  able  to  look  after  himself  or 
herself,  much  less  to  look  after  the  rest  of  us. 

Because  of  such  considerations  as  these,  the  wisdom  of  mankind 
has  for  centuries  moved  toward  the  conclusion  that  government 
should  confine  itself  mainly  to  the  control  of  the  field  where  in- 
dividual interests  come  in  conflict,  leaving  mature  people  of  sound 
mind  to  govern  themselves  wherever  and  whenever  their  interests 
are  harmonious.  There  are  occasional  reactionary  tendencies 
toward  more  government  interference,  but  these  are  usually 
encouraged  by  those  whose  ability  lies  in  the  direction  of  vote 
getting  rather  than  by  those  whose  ability  consists  in  the  power 
to  do  the  useful  and  necessary  things.  It  is  no  accident  that 
talkers  are  frequently  in  favor  of  government  regulation  of  every- 
thing except  their  own  business  of  talking.  They  are  generally 
opposed  to  any  governmental  interference  with  their  own  business. 


LAW  AND  GOVERNMENT  6i 

EXERCISES 


iy^y^l^  L/^y-^'Y^ 


1.  Why  do  we  need  law  ?        "^  •  ,  8  «» 


2.,  Whx  is  it  so,  important  ihat  la\y  be  definite  and  concise  ?tLlL.,._y'_^ 
3.,  Whatjtonr^^:^  conflict  must  thjC  goveramenc  suppr^s  ?    aS^XZtJU^ , 
^4.  Suppose  that  no  one  could  succeed  in  life  except  in  proportion 
as  he  did  useful  things,  would  that  be  a  fulfillment  of  the  words 
"Whosoever  will  be  chief  among  you,   let  him  be  your  servant"?  J^. 
Who  is  your  servant  ?^,-.   ..  -  >  ^-, '     ./.-•►^    ""'^ 

5.  What  is  the  relation  between  confidence  and  economy  P^*' V'*^  ,^-*<^ 

6.  What  is  the  advantage  of  having  money  of  standard  quality r^^£^ 
Would  there  be  a  similar  advantage  in  standardizing  other  things?  <^- ^v*^' 

7.  Is  every  increase  of  power  by  the  government  necessarily  good?       ' 

8.  What  are  some  of  the  things  which  every ^govemm^t.muiJ;  /^^  ' 
if  it  is  to  promote  prosperity  ^A^f^'^,^^ '.■  ^'''  *"'"      ,"^  t*-U^iL^ 

Does  a  government  tend  to  increase  or  to  decrease  itSjOwpr^^ 
ity ?  ■  ^Why ?  ^l^'-'-^-^ f -<-    ^^- ^"  '     -   'V^     ^  --h^^^f^ 


do 

9 
authorit 

10.  Do  people  who  are  at  other  times  incompetent  become  suddenly 
competent  when  they  go  to  the  polls  to  vote?^^ 

11.  If  people  are  generally  incapable  of  taking  care  of  themselves, 
are  they  likely  to  be  capable  of  electing  officials  who  can  take  better 
care  of  them?  /  ■ 

12.  If  the  average  man  is  incapable  of  taking  care  of  himself,  is 
the  average  government  official  likely  to  be  capable  of  taking  care  of 
himself,  to  say  nothing  of  taking  care  of  the  rest  of  the  p>eople?  ''•'■' 


CHAPTER  VIII 


MORALS  AND  RELIGION 


It  was  suggested  in  a  former  chapter  that  the  prosperity  of  a 
nation  depended  more  upon  the  economizing  and  utilizing  of  its 
fund  of  human  energy  than  upon  any  other  factor,  and  that  in 
consequence  the  most  destructive  forms  of  waste  were  those  which 
wasted  or  dissipated  portions  of  that  fund.  When  a  man's  energy 
is  going  to  waste,  his  life  is  going  to  waste,  and  he  becomes  a  drain 
upon,  rather  than  an  addition  to,  the  national  strength.  The 
following  outline  indicates  some  of  the  more  familiar  ways  in 
which  men  go  to  waste, 

_,     .  „    r  Involuntarily  (the  unemployed) 
The  idlei  ,^  ,  .,,,,•  ,  \ 

LVoluntanly  (the  leisure  class) 


People  who  go 
TO  Waste 


^,     .     „     .     ,    ( Through  lack  of  training 
The  meffecUvely  J  ^  ^ 


employed 


The  harmfully 
employed 


Through  lack  of  opportunity 
(^  Through  lack  of  initiative 
'Wasting  their  f  In  vice 

own  energy  1  In  dissipation 
'  By  crime 
Wasting  the  en- 
ergy of  others 
people 


By  fraud 
By  luxury 
By  bad  investing 
.By  false  teaching 


For  some  of  these  forms  of  waste,  law  and  government  alone 
can  furnish  the  remedy.  Whenever  force  or  compulsion  is  neces- 
sary and,  at  the  same  time,  effective,  government  can  and  should 
use  the  force  of  positive  law,  supported  by  penalties.  But  there 
are  many  forms  of  waste  which  cannot  be  remedied  by  force  or 
compulsion,  at  least  not  without  causing  greater  waste  of  other 
kinds.  To  try  to  control  by  law  such  things  as  laziness,  private 
vices,  luxury,  false  teaching,  and  many  other  wasteful  and  harmful 

62 


MORALS  AND  RELIGION  63 

tendencies  would  require  an  intolerable  amount  of  espionage  and 
meddling.  The  waste  from  espionage  and  meddling  might  easily 
overbalance  the  waste  from  the  bad  habits  which  the  laws  were 
trying  to  control.  In  all  such  cases  we  must  fall  back  upon 
morals  and  religion  to  induce  self-restraint  and  the  voluntary 
adoption  of  sound  habits. 

Can  morality  be  taught  ?  There  are  two  conflicting  theories 
as  to  the  results  of  moral  teaching :  one  is  that  such  results  are 
generally  negligible,  because  moral  habits  are  the  result  of  eco- 
nomic and  social  surroundings ;  the  other  is  that  man's  moral 
nature  may  be  so  developed  by  teaching  and  example  as  to  render 
it  proof  against  bad  economic  and  social  conditions, — that  these 
conditions  are  more  likely  to  be  the  result  than  the  cause  of  the 
moral  habits  of  the  people.  The  truth  seems  to  be  found  in  a 
combination  of  these  two  theories.  We  are  undoubtedly  influenced 
by  our  surroundings,  but  we  caa  also  by  sheer  force  of  character 
not  only  resist  but  even  overcome  and  change  our  surroundings. 

Weak  characters  are  more  largely  controlled  by  their  surround- 
ings than  are  strong  characters.  Two  men  may  go  under  a  cold 
shower  bath.  One,  being  in  vigorous  health,  comes  out  feeling 
refreshed.  To  him  a  cold  shower  is  a  favorable  rather  than  an 
unfavorable  condition.  The  other,  being  weak  to  begin  with,  comes 
out  with  a  chill.  To  him  it  was  an  unfavorable  rather  than  a 
favorable  condition.  Yet  it  was  the  same  shower  bath,  with  the 
same  temperature.  If  one  were  studying  jellyfish,  one  might  find 
that  they  were  the  sport  of  such  circumstances  as  the  winds,  the 
waves,  the  tides,  and  the  ocean  currents  ;  but  if  one  were  studying 
sharks,  one  might,  with  equal  certainty,  find  that  they  were  in- 
dependent of  all  such  circumstances.  Similarly,  if  one  were  study- 
ing human  jellyfish,  one  might  find  them  and  their  moral  habits 
to  be  the  result  of  their  economic  and  social  surroundings ;  but  if 
one  were  studying  human  sharks,  one  might  reach  just  the  opposite 
conclusion. 

The  unemployed.  If  we  begin  with  the  involuntarily  idle, 
that  is,  the  unemployed,  we  shall  find  that  many  of  them  are  the 
victims  of  circumstances  which  they  lacked  the  strength  to  combat 


64  ELEMENTARY  ECONOISIICS 

successfully.  Frequently  the  hostile  circumstances  have  been  such 
as  no  one  could  stand  against.  In  other  cases  it  was  their  own 
weakness  or  their  own  injurious  habits  which  made  these  people 
unemployable.  There  is  no  doubt  that  better  moral  and  religious 
teaching  would  have  given  them  a  moral  brace  and  helped  them 
to  succeed.  At  any  rate,  the  fact  that  they  are  now  idle  means 
that  they  are  going  to  waste  and  are  a  drain  upon,  rather  than 
a  contribution  to,  the  national  prosperity,  power,  and  greatness. 
Anything  which  can  be  done  for  future  generations  to  reduce  the 
number  of  such  unemployable  people  will  be  a  definite  contribu- 
tion to  the  strength  of  the  nation.  IVIore  moral  vigor,  sounder 
habits,  and  better  training  are  apparently  needed  for  our  economic 
prosperity  as  well  as  for  purely  moral  or  religious  reasons. 

The  leisure  class.  When  we  come  to  deal  with  the  voluntarily 
idle — that  is,  with  the  leisure  class — we  are  on  more  certain 
ground.  It  is  in  no  sense  their  misfortune,  it  is  their  fault,  that 
they  are  idle.  It  is  not  opportunity  which  they  need  ;  it  is  moral 
regeneration. 

We  must  be  careful,  however,  not  to  confuse  the  person  who 
does  not  have  to  earn  his  living  with  the  person  who  is  idle.  Many 
persons  of  independent  means  are  doing  work  of  the  very  highest 
utility  to  the  nation  and  to  the  world.  Scientific  investigation,  ex- 
perimentation, invention,  historical  and  literary  study,  agricultural 
and  mechanical  demonstration,  political  reform,  and  philanthropy 
have  all  been  promoted  by  men  and  women  who  could  afford  to 
give  their  time  to  such  things. 

The  leisure  class,  properly  so  called,  includes  only  those  who  do 
little  or  nothing  that  is  useful  or  productive,  but  give  themselves 
over  to  mere  self-enjoyment  or  self-cultivation.  Whoever  belongs 
to  the  leisure  class  as  thus  defined  is  a  drain  upon  the  wealth  and 
prosperity  of  the  nation.  The  nation  is  better  off  every  time  such 
a  person  leaves  it,  and  is  worse  off  every  time  such"  a  person 
arrives.  Since  he  does  nothing  useful,  nothing  is  lost  when  he  de- 
parts. His  food  and  clothing  at  least  are  saved.  His  wealth,  of 
course,  remains  behind  even  after  he  is  gone  from  the  world.  The 
more  such  people  there  are  in  the  nation  in  proportion  to  the 


MOR.\LS  AND  RELIGION  65 

workers,  the  worse  it  is  for  the  nation  in  the  long  run.  The  whole 
nation  has  to  be  supported  by  the  labor  of  those  who  work.  If 
all  the  people  work,  the  task  is  lightened  or  else  the  people  live 
better.  If  only  a  part  of  them  work,  the  burden  upon  the  workers 
is  either  heavier  or  else  there  is  less  produced  and  consequently 
less  wealth. 

Do  idle  consumers  make  a  market  for  producers?  It  is 
sometimes  argued,  however,  that  a  large  number  of  consumers  who 
are  not  themselves  producers  is  necessary  to  make  a  market  for 
the  producers.  An  appearance  of  reasonableness  is  given  to  this 
argument  by  taking  the  case  of  a  single  product,  say  shoes,  though 
any  other  product  would  do  equally  well.  It  is  undoubtedly  a 
good  thing  for  the  shoemakers  to  have  a  large  number  of  consum- 
ers of  shoes  who  are  not  themselves  makers  of  shoes,  provided  the 
consumers  have  something  to  give  in  exchange  for  shoes.  The 
more  the  consumers  have  which  can  be  given  in  exchange  for 
shoes,  the  more  profitable  it  is  likely  to  be  for  the  shoemakers. 
If,  however,  many  users  of  shoes  are  living  wholly  on  accumulated 
wealth,  they  will  have  less  to  give  in  exchange  for  shoes  than  they 
would  have  if,  in  addition  to  their  accumulated  wealth,  they  were 
also  producing  or  earning  something.  The  more  workers  there  are 
in  other  productive  fields  besides  shoemaking,  the  more  other 
things  there  will  be  to  be  given  in  exchange  for  shoes. 

The  foregoing  argument  can  be  repeated  with  respect  to  each 
and  every  industry  or  occupation.  This  merely  brings  us  back  to 
the  general  statement  that  the  more  workers  and  the  fewer  idlers 
there  are  in  any  nation,  the  more  abundant  will  goods  of  all  kinds 
become  and  the  more  rapidly  will  the  nation  advance  in  prosperity 
and  power.    Overproduction  of  everything  is  an  impossibility. 

Some  are  willing  to  grant,  however,  that  it  would  be  better 
economically  if  everyone  would  work  than  it  would  be  if  some 
wasted  their  time  in  idleness.  After  admitting  this,  it  will  be 
asked,  nevertheless,  Has  not  a  man  a  right  to  remain  idle  if  he 
has  accumulated  enough  to  support  himself  without  further  work  ? 
Assuming  that  he  has  earned  his  accumulation  and  has  not  secured 
it  by  inheriting  it,  by  marrying  it,  or  by  a  fortunate  speculation 


66  ELEMENTARY  ECONOMICS 

in  land,  there  is  something  to  be  said  for  this  contention.  But  he 
who  does  less  well  than  he  can,  does  ill.  One  who  is  still  capable 
of  doing  useful  work,  and  chooses  not  to  do  it,  is  certainly  doing 
less  well  for  his  country  than  he  might,  even  though  he  did  well 
when  he  accumulated  wealth. 

Should  men  be  allowed  to  accumulate  wealth  ?  But  why  rely 
upon  morals  and  religion  to  prevent  this  form  of  waste  or  ill- 
doing?  Why  not  prevent  men  from  living  in  idleness  by  forbid- 
ding them  to  accumulate  wealth,  or  by  taking  it  away  from  them 
by  law  if  they  do  so?  If  men  are  not  allowed  to  accumulate 
wealth,  they  will  then  be  encouraged  to  consume  their  incomes  as 
they  go  along.  Wasteful  or  luxurious  consumption  is  quite  as 
wasteful  as  idleness. 

Here,  then,  is  the  dilemma.  If  men  whose  incomes  are  larger 
than  necessary  to  support  them  and  their  families  are  not  allowed 
to  accumulate,  they  will  consume  more  than  is  necessary  or  work 
less  strenuously  in  the  present.  If,  on  the  other  hand,  they  are 
allowed  to  accumulate  a  part  of  their  incomes,  some  of  them  will 
be  able  to  accumulate  so  much  that  either  they  or  their  children 
may  live  without  work  at  some  time  in  the  future.  It  is  deemed 
better  and  more  economical  to  encourage  them  to  work  hard  and 
live  economically  in  the  present  by  allowing  them  to  accumulate 
and  then  to  appeal  to  them  on  moral  and  religious  grounds  not 
to  waste  their  lives  in  idleness  or  useless  self-amusement  in  the 
future. 

Let  us  assume,  by  way  of  illustration,  that  two  men,  A  and  B, 
have  equal  incomes,  and  that  their  incomes  are  more  than  suf- 
ficient to  maintain  them  and  their  families  in  efficient  comfort. 
A  consumes  his  entire  income  and  never  accumulates  anything, 
while  B  consumes  only  a  part  of  his  income,  investing  the  re- 
mainder in  productive  enterprises  of  various  kinds.  The  over- 
consumption  of  A  and  his  family  is  wasteful  and  accomplishes 
nothing  for  the  community.  What  they  consume  over  and  above 
that  which  is  necessary  for  efficient  comfort  is  wasted  so  far  as 
the  rest  of  the  country  is  concerned  and  might  just  as  well  have 
been  burned  or  thrown  into  the  sea,  if  that  would  have  given 


MORALS  AND  RELIGION  67 

them  any  amusement  or  satisfaction.  B's  surplus,  however,  has 
gone  into  the  expansion  of  industries  and  the  increase  of  the 
productive  power  of  the  country.  Up  to  this  point  B  has  done 
much  better  than  A.  Now  let  us  assume  that  after  a  period  of 
years  B  decides  that  he  has  worked  long  enough  and  that  he  will 
spend  the  rest  of  his  life  in  sheer  idleness  or  self-amusement.  A, 
having  accumulated  nothing,  cannot  retire,  but  is  compelled  to 
go  on  working  as  long  as  he  is  able.  From  this  point  on,  A  is 
doing  better  than  B.  During  their  whole  lives  it  is  difficult  to 
say  which  does  the  better,  but  the  odds  are  slightly  in  favor  of  B. 
If,  however,  B  can  be  persuaded  not  to  remain  idle,  but  to  con- 
tinue doing  something  useful,  the  advantage  is  decidedly  with  B.^ 

The  ineffectively  employed.  Next  in  order  after  the  idle, 
including  both  the  unemployed  and  the  leisure  classes,  we  have  to 
consider  the  ineffectively  employed.  By  the  ineffectively  employed 
are  meant  all  those  who,  through  lack  of  training,  lack  of  oppor- 
tunity, or  sheer  lack  of  initiative,  are  now  doing  less  useful  work 
than  they  might  have  been  doing  had  they  had  the  proper  training, 
opportunity,  and  initiative.  These  include  men  who  are  doing 
unskilled  work  who  might  have  been  doing  skilled  work,  men 
doing  skilled  manual  work  who  might  have  been  doing  expert 
mental  work,  or  men  doing  routine  mental  work  who  might  have 
been  doing  work  requiring  inventiveness,  originality,  and  enter- 
prise. The  individual  who  remains  less  useful  to  the  nation  than 
he  might  be  is  not  only  doing  himself  an  injury  but  is  also  injuring 
the  nation. 

The  harmfully  employed.  One  very  good  definition  of  a  vice 
is  that  it  is  a  habit  which  wastes  or  dissipates  human  energy.  It 
should,  perhaps,  be  distinguished  from  crime  in  that  vice  wastes 
one's  own  energy,  whereas  crime  wastes  not  only  one's  own  but 
that  of  other  people  besides.  The  use  of  drugs  which  merely 
excite  or  irritate  the  nerves,  overindulgence  in  any  kind  of  excite- 
ment beyond  what  is  necessary  for  recreation,  or  even  excessive 
devotion  to  sport  may  become  a  vice  in  this  sense  as  truly  as 
excessive  eating  or  drinking. 

1  For  a  fuller  discussion  see  the  chapter  on  Luxury. 


68  ELEMENTARY  ECONOMICS 

Luxury.  Luxurious  consumption  can  be  controlled  by  author- 
ity and  compulsion  to  a  certain  extent,  but  not  wholly ;  that  is  to 
say,  there  are  certain  clear  and  undebatable  forms  of  luxurious 
consumption,  such  as  the  use  of  alcohol  and  opium,  which  the 
government  can  safely  prohibit,  but  much  must  be  left  to  the 
discretion  of  the  individual.  There  is  a  timeworn  argument  to 
the  effect  that  luxurious  expenditure  gives  employment  to  labor 
and  thus  benefits  the  poor.  This  is  similar  in  principle  to  the 
theory  that  the  destruction  of  property,  say  the  burning  of  a 
building  or  the  breaking  of  a  window,  gives  employment  to  labor. 
The  stupidity  of  this  argument  was  never  more  clearly  shown  than 
by  Frederic  Bastiat  in  his  famous  work  entitled  "Sophisms  of 
Political  Economy."  He  pictures  a  shopkeeper  who  is  about  to 
chastise  a  scapegrace  son  who  has  broken  a  pane  of  glass.  Some 
sympathetic  bystanders  argue  that  the  boy  is  really  a  public 
benefactor  in  that  he  has  made  work  for  the  glazier,  who  will  then 
have  six  francs,  the  cost  of  a  new  pane,  to  spend,  and  that  the 
butcher,  the  baker,  and  others  will  share  in  the  benefit. 

Assuming  that  it  becomes  necessary  to  spend  six  francs  in  repairing 
the  damage,  if  you  mean  to  say  that  the  accident  brings  in  six  francs 
to  the  glazier,  and  to  that  extent  encourages  his  trade,  I  grant  it 
fairly  and  frankly,  and  admit  that  you  reason  justly. 

The  glazier  arrives,  does  his  work,  pockets  his  money,  rubs  his 
hands,  and  blesses  the  scapegrace  son.    That  is  what  we  see. 

But  if,  by  way  of  deduction,  you  come  to  conclude,  as  is  too  often 
done,  that  it  is  a  good  thing  to  break  windows,  that  it  makes  money 
circulate,  and  that  encouragement  to  trade  in  general  is  the  result,  I 
am  obliged  to  cry,  halt !  Your  theory  stops  at  what  we  see,  and 
takes  no  account  of  what  we  don't  see. 

We  don't  see  that  since  our  burgess  has  been  obliged  to  spend  his 
six  francs  on  one  thing,  he  can  no  longer  spend  them  on  another. 

We  don't  see  that  if  he  had  not  this  pane  to  replace,  he  would  have 
replaced,  for  example,  his  shoes,  which  are  down  at  the  heels ;  or 
have  placed  a  new  book  on  his  shelf.  In  short,  he  would  have  em- 
ployed his  six  francs  in  a  way  in  which  he  cannot  employ  them  now. 
Let  us  see  then  how  the  account  stands  with  trade  in  general.  The 
pane  being  broken,  the  glazier's  trade  is  benefited  to  the  extent  of 
six  francs.     That  is  what  we  see. 


MOR.\LS  AND  RELIGION  69 

If  the  panes  had  not  been  broken,  the  shoemaker's  or  some  other 
trade  would  have  been  encouraged  to  the  extent  of  six  francs.  That  is 
what  we  don't  see.  And  if  we  take  into  account  what  we  don't  see, 
which  is  a  negative  fact,  as  well  as  what  we  do  see,  which  is  a 
positive  fact,  we  shall  discover  that  trade  in  general,  or  the  aggregate 
of  national  industry,  has  no  interest,  one  way  or  the  other,  whether 
windows  are  broken  or  not. 

Let  us  see,  again,  how  the  account  stands  with  Jacques  Bonhomme. 
On  the  last  hypothesis,  that  of  the  pane  being  broken,  he  spends 
six  francs,  and  gets  neither  more  nor  less  than  he  had  before,  namely, 
the  use  and  enjoyment  of  a  pane  of  glass.  On  the  other  hypothesis, 
namely,  that  the  accident  had  not  happened,  he  would  have  expended 
six  francs  on  shoes,  and  would  have  had  the  enjoyment  both  of  the 
shoes  and  the  pane  of  glass. 

Now  as  the  good  burgess,  Jacques  Bonhomme,  constitutes  a  fraction 
of  society  at  large,  we  are  forced  to  conclude  that  society,  taken  in 
the  aggregate,  and  after  all  accounts  of  labor  and  enjoyment  have 
been  squared,  has  lost  the  value  of  the  pane  which  has  been  broken. 

In  one  respect  the  argument  against  luxury  is  less  strong  than 
that  against  the  breaking  of  a  pane  of  glass,  but  in  another  respect 
it  is  stronger.  When  the  shopkeeper  in  the  story  has  to  spend  six 
francs  on  a  pane  of  glass,  he  gets  no  satisfaction  out  of  it  and 
deprives  himself  of  a  pair  of  shoes  which  he  needs.  Had  he  spent 
the  six  francs  on  a  luxury,  he  would  presumably  have  got  some 
enjoyment  out  of  it,  even  though  it  had  been  followed  by  indiges- 
tion or  a  headache.  To  this  extent  it  would  have  been  better  to 
have  a  luxury  costing  six  francs  than  to  have  been  compelled, 
through  the  carelessness  of  an  overexuberant  son,  to  spend  that 
amount  on  a  pane  of  glass.  On  the  other  hand,  when  one  com- 
pares the  expenditure  of  money  for  a  luxury  with  the  investment 
of  money  in  tools  or  other  instruments  of  production,  one  does 
not  get  so  favorable  a  picture. 

If  you  have  a  dollar  to  spend  over  and  above  what  is  necessary 
to  maintain  you  in  efficient  comfort,  you  have  your  choice  of 
spending  it  on  some  unnecessary  article  of  consumption  or  of 
investing  it  in  some  productive  enterprise.  WTiether  it  be  a  dollar 
or  a  hundred  thousand  dollars,  the  principle  is  the  same.  If  you 
decide  to  invest  your  money  in  a  productive  enterprise,  you  tend, 


70  ELEMENTARY  ECONOMICS 

to  the  extent  of  your  investment,  to  set  labor  to  work  erecting  the 
buildings  or  manufacturing  the  machines  which  will  be  needed  in 
production.  The  more  people  there  are  who  are  investing  in  this 
way,  and  the  more  they  invest,  the  more  productive  enterprises  we 
shall  have.  This  not  only  sets  labor  to  work  preparing  the  build- 
ings and  machinery  but  will  continue  to  employ  labor  to  run  the 
enterprises.  Again,  as  a  result  of  this,  more  goods  are  produced 
and  the  nation  is  better  fed,  clothed,  and  supplied  with  all  neces- 
saries. It  is,  therefore,  very  much  better  that  there  should  be  a 
great  many  people  investing  their  money  productively  than  that 
they  should  merely  spend  their  money  for  extravagant  luxuries 
which  are  of  no  use  to  anyone  except  themselves.  He  therefore 
does  badly  who  spends  his  money  luxuriously  when  he  might 
invest  it  productively. 

Emulation  in  extravagance.  Nothing  could  contribute  more 
to  the  general  prosperity  and  well-being  of  the  nation  than  such 
moral  habits  as  would  discourage  extravagant  consumption  and 
encourage  thrift  and  wise  investments  in  all  sorts  of  productive 
enterprises.  A  particularly  vicious  and  wasteful  factor  in  many 
a  social  group  is  competition  or  emulation  in  extravagance.  We 
have  all  doubtless  heard  of  cases  like  that  of  the  neighborhood 
that  was  bankrupted  because  one  family  got  a  new  oriental  rug 
and  every  other  family  immediately  tried  to  outshine  that  one  by 
purchasing  something  still  more  expensive,  until,  before  long,  each 
family  was  going  into  debt  to  keep  up  with  its  neighbors.  Of  all 
forms  of  competition,  competitive  consumption  is  the  most  per- 
nicious and  wasteful. 

Emulation  in  the  waste  of  physical  energy.  It  is  not  only 
the  possession  of  plenty  of  money  which  is  thus  vulgarly  adver- 
tised. The  possession  of  abounding  physical  energy  is  also  adver- 
tised by  the  practice  of  conspicuous  vices  which  tend  to  dissipate 
energy.  The  young  man  who  can  dissipate  freely  can  thus  adver- 
tise that  he  is  rich  in  health  and  energy,  just  as  a  newly  rich 
man,  by  spending  money  extravagantly,  can  advertise  to  the  world 
that  he  has  money  to  spare.  When  there  is  no  sense  of  moral 
values  and  no  sober  self-restraint,  the  possession  of  abundant 


MORALS  AND  RELIGION  71 

health  and  the  possession  of  abundant  wealth  lead  to  equally 
demoralizing  vices.  The  poor  are  safeguarded  by  their  poverty 
from  the  extravagant  use  of  money,  but  they  are  quite  as  likely 
to  indulge  in  the  extravagant  uses  of  vitality  as  are  the  rich. 
If  there  be  any  difference,  the  dissipation  of  physical  energy  is 
worse  than  the  dissipation  of  money. 

EXERCISES 

1.  What  are  the  principal  classes  of  people  who  go  to  waste? 

2.  Can  morality  be  taught?    Give  your  x^s>oviS^ j^^;^^^^^^^^  y^w-^v^ 

3.  Is  a  leisure  class  desirable?   '^  r  -  ''^n  aX     ^j^wJ^*^*^  i^  .    .hU-iK 

4.  Do  idle  consumers  make  a  market  for  producers  ?^^^£ii-^^^:AJk^ 

5.  Would  it   cure  idleness  if  men  were   forbidden  to  accumulate 
large  wealth^ Would  it  encourage  extravagance?    „ 

6.  In  what  sense  is  vice  a  form  of  waste?  .•K^^W^^^v-**'  A'**'*'^^  ^/'^J 


7.  Is  luxury  a  vice  ?     Does  it  help  business  ? 

8.  Which  is  worse,  to  use  money  wastefully  or  to  iispjmg's  strpngth 

and  vitality  wastefully? 


PART  TWO.    ECONOMIZING  LABOR 


CHAPTER  IX 

THE  DIVISION  OF  LABOR 

As  stated  in  Chapter  I  the  primary  factors  in  the  production  of 
wealth  are  the  people  and  the  geographical  situation.  What  the 
people  supply  is  labor,  and  it  is  very  imgoitant-that-iiris^aUor  be 

economizedj    that  is,   that  it  hp  t;^  ^iIjIiVpH    a<;  tn  malfp  parVi    HP<^ 

every  unit  ofjt^ produce  as  much  as  possible.  It  is  economized 
chiefly,  first,  by  its  specialization ;  second,  by  its  use  ot-pewer- 
other  than  that  engendered  in  its  own  muscles ;  third,  by  the  use  of 
tools,  machines,  and  equipment  of  all  kinds  ;  fourth,  by  the  organi- 
zation of  Busmess ;  and,  fifth,  by  the  balancing  of  all  the  factors 
of  production."  The  subject  of  the  present  chapter  is  the  division 
of  labor,  which  is  an  older  name  for  the  specialization  of  labor. 

Meaning  of  the  division  of  labor.  Adam  Smith  begins  his 
great  "Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of 
Nations"  with  a  discussion  of  the  division  of  labor.  His  state- 
ment of  the  case  has  scarcely  been  improved  upon  up  to  the  present 
day,  though  many  of  his  illustrations  are  out  of  date.  By  a 
division  of  labor  he  means,  first,  a  system  under  which  no  one 
produces  everything  he  needs,  but  each  one  confines  himself  to  the 
production  of  that  one  thing  or  those  few  things  for  the  produc- 
tion of  which  he  is  best  fitted,  exchanging  his  surplus  product  for 
the  surplus  products  of  others  who  are  specializing  on  other 
things ;  second,  the  process  of  dividing  the  work  involved  in 
the  making  of  a  given  article  (each  man  performing  some  single 
operation)  and  then  assembling  all  the  parts,  producing  a  complete 
whole. 

Advantages.  Adam  Smith  names  three  distinct  advantages 
which  result  from  the  division  of  labor : 

First,  the  improvement  in  the  dexterity  of  the  workman  necessarily 
increases  the  quality  of  the  work  he  can  perform ;  and  the  division 

75 


76  ELEMENTARY  ECONOMICS 

of  labor,  by  reducing  every  man's  business  to  some  one  simple  oper- 
ation, and  by  making  this  operation  the  sole  employment  of  his  life, 
necessarily  increases  very  much  the  dexterity  of  the  workman.  .  .  . 
Secondly,  the  advantage  which  is  gained  by  saving  the  time  commonly 
lost  in  passing  from  one  sort  of  work  to  another,  is  much  greater 
than  we  should  at  first  view  be  apt  to  imagine  it.  It  is  impossible 
to  pass  very  quickly  from  one  kind  of  work  to  another  that  is  carried 
on  in  a  different  place  and  with  quite  different  tools.  .  .  .  Thirdly 
and  lastly,  everybody  must  be  sensible  how  much  labor  is  facilitated 
and  abridged  by  the  application  of  proper  machinery.  It  is  unnec- 
essary to  give  any  example.  I  shall  only  observe,  therefore,  that 
the  invention  of  all  those  machines  by  which  labor  is  so  much 
facilitated  and  abridged,  seems  to  have  been  originally  owing  to  the 
division  of  labor.  Men  are  much  more  likely  to  discover  easier  and 
readier  methods  of  attaining  any  object,  when  the  whole  attention 
of  their  minds  is  directed  toward  that  single  object,  than  when  it  is 
dissipated  among  a  great  variety  of  things.  But,  in  consequence  of 
the  division  of  labor,  the  whole  of  every  man's  attention  comes  natu- 
rally to  be  directed  towards  some  one  very  simple  object.  It  is 
naturally  to  be  expected,  therefore,  that  some  one  or  other  of  those 
who  are  employed  in  each  particular  branch  of  labor  should  soon  find 
out  easier  and  readier  methods  of  performing  their  own  particular 
work,  wherever  the  nature  of  it  admits  of  such  improvement.  A  great 
part  of  the  machines  made  use  of  in  those  manufactures  in  which 
labor  is  most  subdivided,  were  originally  the  invention  of  common 
workmen.^ 

Adam  Smith's  opinion  that  the  third  and  last  of  these  advan- 
tages was  of  special  importance  has  been  fully  justified  by  subse- 
quent experience.  Machines  have  now  taken  the  place  of  the 
simple  tools  of  that  day.  Sometimes  these  machines  are  directed 
and  fed  by  attendant  laborers,  but  sometimes  they  are  so  perfected 
as  to  require  very  little  attention,  feeding  themselves  automatically 
and  stopping  automatically  when  anything  goes  wrong.  In  these 
cases  the  work  of  the  attendant  is  reduced  to  a  minimum,  con- 
sisting merely  in  starting  the  machines  and  putting  them  in  order 
when  anything  goes  wrong. 

There  are  penalties,  however,  to  be  paid  for  the  extreme  division 
of  labor  to  which  we  have  become  accustomed.  It  is  undoubtedly 
^  Wealth  of  Nations,  chap.  i. 


THE  DIVISION  OF  LABOR  77 

efficient  and  economical ;  without  it  many  articles  which  are  now 
enjoyed  by  great  masses  of  people  would  be  so  scarce  as  to  be 
available  only  for  the  very  few  ;  but  it  puts  a  great  strain  upon 
the  people  who  specialize.  The  ability  to  give  close  attention  to 
one  thing  for  a  long  time  is  not  very  widely  distributed.  Only 
the  superior  races  possess  it ;  and  even  within  these  races  there 
are  many  people  who  lack  it,  especially  in  their  early  youth.  They 
easily  become  discontented  and  restless  if  required  to  work  under 
conditions  of  extreme  specialization.  They  would  be  much  better 
satisfied  with  more  desultory  work,  even  though  such  work  ac- 
complished less.  This  is  one  of  the  reasons  why  the  quality  of 
the  people  is  such  an  important  factor  in  national  prosperity. 
A  people  who  cannot  stand  specialized  work  will  easily  be  left 
behind  by  a  people  who  can. 

Two  kinds  of  division  of  labor.  As  suggested  above,  the  divi- 
sion of  labor  takes  on  a  somewhat  different  character  when  highly 
developed  machinery  comes  into  general  use.  This  may  be  ex- 
plained further  by  pointing  out  two  kinds  of  division.  One  has 
been  called  contemporaneous  division  of  labor  and  the  other  suc- 
cessive division  of  labor.  Under  the  contemporaneous  division  of 
labor  men  are,  at  the  samev  time,  specializing  in  different  lines~oJ 
production.  One  group  is  producing,  let  us  say,  breadstuffs  and 
bread,  another  meat,  another  textile  fabrics  and  clothes,  and  so  on, 
each  group  bringing  some  kind  of  raw  material  through  the  various 
stages  of  production  until  it  matures  into  a  finished  product 
ready  for  consumption.^ 

Another  phase  of  the  contemporaneous  division  is  found  when 
different  men  are,  at  the  same  time,  producing  different  parts  of 
the  same  product,  the  parts  being  later  assembled  into  a  finished 
whole.  Lumbermen  are  cutting  the  timber  which  eventually  goes 
into  a  house,  while  men  in  the  ore  beds  are  getting  out  the  iron  ore 
which  eventually  goes  into  the  house  in  the  form  of  nails,  and 
still  other  workmen  are  making  the  brick  or  quarrying  the  stone 
which  will  eventually  go  into  the  foundations  and  the  chimneys. 

^  See  Taussig,  Wages  and  Capital,  p.  6.    New  York,  1898. 


78  ELEMENTARY  ECONOMICS 

Under  the  successive  division  of  labor  different  sets  of  men  are 
working  on  the  same  material,  bringing  it  forward  through  the 
successive  stages  to  maturity.  Thus,  following  the  choppers  who 
fell  the  trees  come  the  sawyers  who  saw  them  into  rough  boards, 
the  carriers  who  transport  the  boards,  the  men  in  the  planing 
mill  who  plane  them,  and  so  on,  until  the  carpenters  fit  them  into 
their  places  in  the  house.  The  iron  ore  goes  through  similar  stages, 
as  does  every  bit  of  material  which  enters  into  the  final  product. 

The  lengthening  of  the  process.  This  lengthening  out  of  the 
process  of  production,  making  it  extend  over  a  longer  period  of 
time,  is  one  of  the  most  striking  characteristics  of  the  era  of 
machine  production.  It  calls  for  more  foresight,  more  planning 
for  the  distant  future,  more  expenditure  of  labor  and  investing 
of  capital  long  in  advance  of  the  consumption  of  goods,  than  was 
ever  necessary  or  possible  in  any  previous  age.  There  is,  therefore, 
under  this  regime,  a  greater  demand  than  ever  before  for  foresight, 
for  thrift,  for  courageous  investment,  for  the  hazarding  of  large 
sums  on  the  chance  of  gains  in  the  distant  future.  There  may 
be  some  connection  between  this  fact  and  the  fact  that  the 
large  rewards,  in  our  day,  go  to  the  men  who  exercise  foresight, 
who  invest  courageously  and  wisely,  who  hazard  their  time  and 
wealth  on  enterprises  which  look  to  the  future. 

Work  done  in  different  places.  The  contemporaneous  division 
of  labor  has  to  do  with  space ;  that  is,  it  involves  the  doing  of 
different  kinds  of  work  in  different  places  at  the  same  time.  This 
calls  for  the  coordination  of  that  labor  and  the  exchange  of  prod- 
ucts in  order  that  each  specialist  or  specialized  group  may  get 
the  advantage  not  only  of  its  own  efficiency  but  of  that  of  other 
specialists  and  specialized  groups.  Where  different  workers  are  at 
the  same  time,  but  in  different  places,  working  on  different  parts 
of  the  same  product,  it  is  necessary  that  someone  should  coordinate 
their  work.  In  a  great  automobile  factory,  for  example,  there  are 
many  different  parts  being  produced  simultaneously.  In  order 
that  these  parts  may  all  be  assembled  and  fitted  together  there 
must  be  very  careful  planning  and  organization.  This  is  what  is 
meant  by  the  coordination  of  labor  performed  in  different  places. 


THE  DIVISION  OF  LABOR  79 

The  time  element.  The  successive  division  of  labor  has  to 
do  with  time ;  that  is,  it  involves  doing,  at  different  times,  by 
different  men,  different  parts  of  the  work  of  completing  an  article. 
In  the  same  automobile  factory  the  same  piece  of  material  is 
worked  upon  by  many  men  in  a  regular  order  of  succession.  This 
calls  for  the  coordination  of  labor  performed  at  different  times. 

The  lengthening  out  of  the  process  of  production  in  the  whole 
of  modern  society  makes  this  form  of  coordination  peculiarly  im- 
portant. Its  greatest  importance,  however,  is  found  outside  any 
individual  factory.  Before  the  automobile  factory  could  be  built, 
there  must  have  been  much  work  done  in  procuring  the  raw 
materials  for  the  building  and  the  machines,  in  producing  food 
and  clothing  for  laborers,  and  in  doing  a  multitude  of  other  things. 
Similarly,  before  shoes  can  be  made,  cattle  must  be  raised,  slaugh- 
tered, and  their  hides  tanned ;  shoe  factories  must  be  erected  and 
equipped  with  products  from  the  mines  and  forests,  and  a  vast 
amount  of  preparation  must  be  made  in  other  ways.  The  labor  of 
the  herdsman  must  be  coordinated  with  that  of  the  clerk  in  the 
shoe  store,  otherwise  we  should  not  have  shoes  as  we  now  have 
them.  Unless  this  coordination  is  brought  about,  the  same  man 
would  have  to  kill  the  animal,  skin  it,  tan  the  hide,  and  go  through 
all  the  processes  necessary  to  the  finishing  of  a  pair  of  shoes. 

Territorial  division  of  labor.  In  one  of  its  broader  aspects  the 
contemporaneous  division  of  labor  is  known  as  the  territorial 
division  of  labor.  This  is  what  takes  place  when  one  region  pro- 
duces that  for  which  it  is  best  fitted,  and  exchanges  its  surplus  for 
the  surplus  of  other  regions  which  are  also  specializing  on  those 
products  for  which  they  are  best  fitted.  Thus,  our  Middle  Western 
states  of  the  upper  Mississippi  Valley  produce  hay,  grain,  and 
live  stock,  not  only  to  supply  bread,  meat,  and  dairy  products  for 
themselves  but  for  the  rest  of  the  country  as  well,  besides  sending 
a  great  deal  abroad.  The  South  grows  cotton  enough  to  supply 
the  greater  part  of  the  world.  Both  regions  receive  in  exchange 
for  these  farm  products  the  manufactured  products  of  the  Eastern 
states  and  foreign  countries  and  the  mineral  products  of  the 
mountain  states  and  the  upper  regions  of  the  Great  Lakes. 


8o  ELEMENTARY  ECONOMICS 

Territorial  division  of  labor  and  transportation.  It  is  the 
territorial  division  of  labor  which  gives  rise  to  the  important  busi- 
ness of  transporting  goods  from  one  region  to  another.  Obviously, 
if  one  region  should  find  it  advantageous  to  produce  everything 
needed  or  desired  by  its  inhabitants,  there  would  be  no  occasion 
for  transporting  goods  into  it.  Similarly,  if  it  did  not  produce  a 
surplus  of  something  or  other  which  could  be  sold  on  an  outside 
market,  there  would  be  no  occasion  for  transporting  goods  out- 
ward. At  the  same  time,  the  territorial  division  of  labor  is  made 
possible  by  the  transportation  of  goods  and  tends  to  grow  in  im- 
portance in  proportion  as  transportation  becomes  cheaper  and  more 
efficient.  A  slight  advantage  in  the  exchange  of  products  might 
easily  be  overcome  by  a  heavy  transportation  cost.  For  example, 
even  though  New  England  cannot  grow  wheat  so  economically  as 
Kansas  or  North  Dakota,  yet  if  the  cost  of  transporting  wheat 
over  the  intervening  distance,  and  of  transporting  manufactured 
products  back  to  pay  for  the  wheat,  were  very  high.  New  England 
might  find  it  advantageous  to  grow  her  own  wheat,  and  the  states 
which  now  produce  wheat  might  find  it  advantageous  to  do  their 
own  manufacturing. 

The  advantages  of  a  territorial  division  of  labor,  where  the 
transportation  problem  is  easy,  are  similar  to  those  which  result 
from  a  division  of  labor  among  individuals  in  the  same  neighbor- 
hood. If  it  is  profitable  for  each  individual  to  specialize  upon  the 
work  for  which  he  is  best  fitted,  it  is  equally  profitable  for  each 
neighborhood  to  specialize. 

In  almost  any  neighborhood,  however,  there  is  some  diversity 
of  soil  and  natural  resources  as  well  as  a  diversity  of  talents 
among  the  people.  Therefore  it  will  seldom  happen  that  a  whole 
neighborhood,  much  less  a  whole  region  of  considerable  size,  can 
profitably  specialize  upon  a  single  product.  It  is  more  likely  to 
happen  that  a.  whole  neighborhood  or  region  will  find  it  advan- 
tageous to  specialize  upon  a  number  of  products.  Thus,  New 
England,  the  South,  and  the  Corn  Belt  all  produce  a  considerable 
variety  of  products,  but  each  also  finds  it  advantageous  to  import 
a  considerable  variety  of  other  products.  New  England,  for  ex- 
ample, probably  secures  her  bread  and  meat  at  less  cost  to  herself 


THE  DIVISION  OF  LABOR  8l 

by  devoting  most  of  her  energy  to  manufacturing  and  then  ex- 
changing her  manufactured  products  for  the  wheat  and  beef  of 
the  West  than  she  would  if  she  tried  to  grow  enough  of  these 
important  food  products  on  her  own  soil  to  feed  all  her  people. 

International  division  of  labor.  WTien  the  territories  con- 
sidered are  not  different  sections  of  the  same  country  but  different 
countries,  we  have  what  is  known  as  the  international  division  of 
labor.  Were  it  not  for  certain  uneconomic  factors  which  enter 
into  the  problems  of  national  life  and  existence,  everything  which 
can  be  said  in  favor  of  a  territorial  division  of  labor  and  freedom 
of  exchange  within  a  country  could  also  be  said,  and  with  equal 
force,  in  favor  of  an  international  division  of  labor.  The  chief  of 
these  uneconomic  factors  is  the  possibility  of  war.  War  is  the 
greatest  disturber  of  normal  economic  activities,  and  until  it  can 
be  eliminated  every  nation  must  calculate  upon  its  possibility  and 
be  prepared  for  it.  In  case  of  war  a  nation  which  is  not  prepared 
to  produce  all  the  necessaries  of  life,  as  well  as  all  military  supplies, 
may  find  itself  helpless  before  a  foreign  enemy.  Its  only  other 
hope  would  be  to  keep  open  the  channels  of  commerce  which  con- 
nect it  with  outside  sources  of  supply,  but  this  is  one  of  the  things 
which  the  enemy  country  would  try  to  prevent.  Nitrates,  for 
example,  are,  in  the  present  state  of  science,  necessary  both  for 
fertilizers  and  for  explosives.  A  country  which  could  neither  pro- 
duce its  own  nitrates  nor  manage  to  get  a  supply  from  abroad 
could  not  wage  war  for  a  very  long  time. 

Adam  Smith's  remarks,  quoted  earlier  in  this  chapter,  regarding 
the  way  in  which  the  minute  division  of  labor  has  aided  in  the 
invention  and  improvement  of  machinery  may  be  applied  to  the 
much  greater  problem  of  the  development  and  improvement  of  a 
great  and  complex  industrial  system.  WTien  each  workman  spends 
all  his  time  performing  a  single  operation,  it  is  much  easier  for  him 
to  devise  a  better  way  of  doing  it  than  it  would  be  if  he  had  to 
give  his  attention  to  many  things.  It  is  probable  that  no  im- 
portant and  complicated  machine  was  ever  invented  and  made  to 
work  successfully  without  a  great  deal  of  trying  out,  modification, 
and  general  improvement.  In  actual  use  many  weaknesses  in  the 
machine  are  revealed  which  no  inventor,  however  wise,  could  have 


82  ELEMENTARY  ECONOMICS 

foreseen  and  prevented.  Even  such  a  simple  device  as  a  bicycle 
passed  through  a  long  and  interesting  evolution  before  it  reached 
a  stage  which  made  it  generally  useful  and  popular.  The  aero- 
plane is  another  illustration  of  gradual  and  detailed  improvement 
after  it  was  actually  in  use. 

If  it  is  impossible  for  any  human  intelligence  to  invent  and 
construct  at  once  a  satisfactory  machine,  it  would  be  obviously 
impossible  to  have  invented  and  organized  a  whole  industrial  sys- 
tem. That  would  present  an  infinitely  more  difficult  problem  than 
the  invention  and  construction  of  any  machine  that  was  ever  built. 
It  has  been  by  age-long  trial  and  error,  variation  and  selection, 
experiment  and  failure,  that  even  a  tolerably  successful  industrial 
system  has  been  worked  out.  There  are  doubtless  endless  improve- 
ments yet  to  be  made,  but  they  will  certainly  be  made  by  the 
same  process  of  gradual  and  piecemeal  adjustment.  Anyone  who 
thinks  that  he  can  devise  and  organize  a  better  system  than  the 
present  shows,  by  the  very  fact  that  he  thinks  so,  that  he  is  un- 
fitted for  the  task.  He  shows  that  he  lacks  the  first  element  in 
fitness ;  namely,  a  knowledge  of  the  vastness  of  the  problem  and 
the  infinite  number  of  difficulties  to  be  overcome.  It  is  different, 
however,  with  one  who  thinks  of  some  detail  in  the  present 
industrial  system  which  might  be  improved.  This  presents  a 
problem,  worthy  of  the  greatest  minds.  ,      ^^  ^ 

>  '^..l^^'Iw^wTZ^*^    EXERCISE^ 


^  !J^ J-«J3^^^Y^-*^ 


1.  What  are  the  principal  methods  of  economizing  labor? 

2.  What  is  meant  by  the  division  of  labor?    '  7l!^j^^^    ,  I    t 

3.  What  are  its  chief  advantages?  o  '^^^^^^^^JX^Sif*^  yri 
..tr^ir.^'4;'What  are  the  two  kinds  of  divisfon*^  iabof ?'^^'^^<^5uJ'^ '^''^ 
^'*'"*^^    5.  What  is  meant  by  the  contemporaneous  division  of  labor? "^^ 

6.  What   is   meant  by   the  successive   division   of   labor  ?/^What 
is  its  relation  to  thrift  and  foresight ?/|^^|c, -J^iU^  V^" 

7.  What  is  the  relation  of  transpOTtati<m  to  tin 
jD^  labori     What  are  its  advantages?  jy^' 

'  >•   8.  What  is  meant  by  the  international  division  of  labor  ?     What 
;/'  are  some  of  its  advantages  and  disadvantages?         ^ 


CHAPTER  X 
POWER 

One  of  the  most  effective  ways  of  economizing  labor  is  the  use 
of  other  sources  of  power  than  man's  own  body.  Physically  he 
is  not  particularly  strong,  and  if  he  had  to  rely  upon  his  own 
bodily  strength  alone  he  could  not  accomplish  very  much. 

Power  needed  for  moving  material  objects.  It  has  been 
pointed  out  many  times  that  man's  work,  on  the  physical  side  at 
least,  consists  in  moving  material  objects.  For  this  work  the  first 
essential  is  power.  The  power  first  applied  was,  of  course,  that 
which  was  generated  in  his  own  body  and  exercised  through  his 
own  muscles.  But  the  secret  of  the  industrial  success  of  modern 
civilized  nations  lies  in  their  command  of  other  sources  of  power 
rather  than  in  any  superior  muscularity  of  their  own. 

Importance  of  animal  power.  The  first  of  these  sources  of 
power  which  man  utilized  on  a  large  scale  was  that  of  animals 
which  he  domesticated  and  enslaved.  They  are  still  one  of  the 
most  important  sources,  if  not  the  most  important  source,  of 
power.  According  to  the  Yearbook  of  the  United  States  Depart- 
ment of  Agriculture,  there  were  on  the  farms  of  the  United  States 
on  January  i,  19 19,  about  26,459,000  horses  and  mules,  to  say 
nothing  of  those  in  use  in  the  cities  and  towns.  The  latest  figures 
for  horses  and  mules  not  on  farms  are  those  given  in  the  census 
of  1910.  On  April  15  of  that  year  there  were  3,453,000.  Assum- 
ing that  there  were  as  many  in  19 19,  it  would  bring  the  total  up 
to  29,912,000.  Some  of  those  on  farms,  of  course,  are  colts  too 
young  to  work.  Those  of  working  age,  both  on  farms  and  not  on 
farms,  are  probably  close  to  26,000,000.  Besides  horses  and  mules, 
a  few  oxen  are  still  used.  The  "primary  horse  power" — that  is, 
horse  power  in  its  original  sense — used  in  manufacturing  in  the 
United  States  in  1914  was  estimated  at  22,547,574.    It  has  been 

83 


84 


ELEMENTARY  ECONOMICS 


increasing  rapidly,  so  that  by  19 19  it  was  certainly  much  larger. 
It  is  not  easy  to  compare  the  actual  working  power  of  a  horse  with 
that  of  the  horse-power  unit  as  used  in  measuring  the  power  of  a 
steam  engine,  but,  assuming  that  they  are  equal,  it  would  appear 


WHERE  POWER  IS   SUPPLIED   BY   HUMAN    MUSCLES.     RICE 
FARMING  IN  JAPAN 

that  the  total  animal  power  in  use  in  the  United  States  was, 
until  recently,  very  nearly  as  great  as  the  total  steam  and  water 
power  used  in  manufacturing. 

Historical  importance  of  the  ox.  The  ox,  from  the  most 
ancient  times  until  quite  recently,  has  been  the  chief  if  not  the 
sole  draft  animal  of  all  the  races  that  have  used  draft  animals  at 


POWER  8s 

all.  His  docility  and  patience,  his  great  strength,  the  cheapness  of 
his  harness,  and  his  ability  to  find  his  own  living  when  not  at 
work  contributed  to  make  him  a  most  valuable  assistant  to  man 
in  his  struggle  for  the  conquest  of  the  earth.  In  the  pulling  of  the 
heavy  wooden  plows  and  harrows  that  were  in  use  before  the 
modern  steel  tools  were  invented,  and  of  the  lumbering  carts  that 
were  in  use  before  modern  vehicles  were  constructed,  he  enabled 
men  to  cultivate  the  soil  on  a  vastly  more  extensive  scale  than 
would  have  been  possible  by  human  muscles  alone.  He  thus  con- 
tributed to  the  production  of  food  for  increasing  populations  of 
men,  and  in  the  end  he  contributed  his  own  body  to  help  feed  them 
and  his  own  hide  in  order  that  they  might  be  shod.  In  many  parts 
of  the  world  he  is  still  the  principal  draft  animal  for  farm  work. 
If  we  take  the  whole  history  of  man's  use  of  power,  it  is  probable 
that  the  ox  has  furnished  more  in  the  aggregate  than  any  other 
agency,  not  excluding  coal  and  steam. 

Solar  energy.  The  great  physical  source  of  power,  so  far  as 
man  has  been  able  to  develop  it,  is  understood  to  be  the  sun.  The 
amount  of  solar  energy  which  comes  to  the  earth  in  the  form  of 
light  and  heat  is  so  stupendous  as  to  bewilder  the  imagination.  Its 
most  important  service  is  in  the  promotion  of  plant  growth  and, 
through  plants,  of  animal  growth ;  but  it  is  also  transformed  into 
mechanical  power  in  a  number  of  ways. 

In  the  first  place,  it  vaporizes  water,  which  then  rises.  When  this 
water  vapor  reaches  high  altitudes  and  is  congealed  it  falls  in  the 
form  of  rain,  snow,  etc.  Some  small  fraction  of  it  falls  on  moun- 
tains and  other  high  portions  of  the  earth's  surface,  whence  it  flows 
downward  through  the  streams.  These  are  harnessed  and  made  to 
turn  water  wheels,  thus  furnishing  mechanical  power  to  do  man's 
work ;  that  is,  to  move  pieces  of  matter. 

In  the  second  place,  through  plant  growth  combustible  material 
is  stored  up  in  the  bodies  of  trees  and  other  plants,  thus  producing 
fuel.  The  accumulation  and  covering  over  of  vast  masses  of 
combustible  vegetable  material  in  previous  geological  periods  gave 
us  our  coal  beds,  which  have  recently  become  a  principal  source 
of  both  artificial  heat  and  mechanical  power.     It  is  generally 


g6  ELEMENTARY  ECONOMICS 

supposed  that  petroleum  is  of  animal  origin.  If  so,  it  is,  like 
coal,  the  product  of  solar  energy. 

In  the  third  place,  the  direct  rays  of  the  sun  may  be  so  con- 
centrated as  to  produce  an  intense  heat,  which  may,  in  turn,  be 
used  to  transform  water  into  steam.  According  to  tradition  the 
great  mathematician  Archimedes  burned  the  Roman  ships  which 
were  besieging  his  native  city  of  Syracuse  by  the  use  of  a  large 
number  of  mirrors.  By  reflecting  the  sun's  rays  from  all  these 
mirrors  upon  a  single  spot  so  much  heat  was  concentrated  as  to 
set  the  ships  on  fire,  one  after  another.  Solar  engines  have  lately 
been  constructed  which  make  use  of  converging  mirrors  for  the 
concentration  of  the  sun's  rays.  This  produces  an  intense  heat, 
which,  in  turn,  converts  water  into  steam. 

Winds.  In  the  next  place,  if  we  may  assume  that  winds  are 
in  general  caused  by  variations  in  temperature,  they  may  be  said 
to  be  derived  from  solar  energy.  This  mechanical  power,  as  used 
for  the  moving  of  boats,  has  been  of  the  very  greatest  importance 
in  the  development  of  commerce  and  the  spread  of  civilization. 
The  epoch-making  voyages  of  Columbus,  as  well  as  the  voyages 
of  great  numbers  of  men  less  noteworthy  than  he,  were  made 
possible  by  the  ingenuity  with  which  man  had  learned  to  utilize 
this  vast  source  of  power.  For  certain  kinds  of  stationary  work 
which  does  not  have  to  be  performed  regularly,  such  as  pumping 
water,  grinding  grain,  etc.,  the  windmill  has  proved  an  economical 
device  for  utilizing  the  power  of  the  winds. 

Tides.  Another  source  of  power  of  which 'some  use  has  been 
made  is  the  tide.  This  can  be  traced  to  the  momentum  of  the 
earth  rather  than  to  solar  energy.  The  rising  and  the  falling  of 
the.  tides,  especially  along  coasts  with  many  inlets  and  estuaries, 
have  created  opportunities  for  tide  mills  which  can  be  made  to 
do  certain  kinds  of  work. 

Sources  of  power  in  the  distant  future.  With  all  these  sources 
of  power,  and  possibly  others  which  may  be  developed,  there  is 
no  likelihood  that  our  ingenious  race  will  ever  be  compelled  to 
fall  back  upon  its  own  muscles,  or  even  to  depend  exclusively  upon 
animal  power.    In  that  distant  day  when  our  coal  beds  and  oil 


88  ELEMENTARY  ECONOMICS 

fields  are  exhausted,  the  sun's  rays  will  still  continue  to  strike  the 
earth.  That  being  the  case,  trees  and  other  plants  will  still  grow, 
though  wood  could  scarcely  take  the  place  of  coal  and  petroleum. 
Alcohol  can  scarcely  become  as  cheap  as  gasoline  has  been  in  the 
past,  but  it  can  be  manufactured  in  considerable  quantities  from 
a  variety  of  plants.  Again,  the  rains  and  the  snows  will  continue 
to  feed  our  rivers  and  turn  our  water  wheels.  Electrical  transmis- 
sion will  enable  us  to  utilize  many  streams  now  running  idly  to 
the  sea  and  to  distribute  the  power  over  wide  areas  and  send  it 
long  distances  from  the  streams.  Solar  engines  may  be  so  perfected 
as  to  enable  us  to  utilize  the  inconceivable  and  inexhaustible  flow 
of  energy  which,  comes  to  us  in  the  form  of  direct  rays  from  the 
sun.  The  winds  will  continue  to  blow  and  push  our  sails  and 
turn  our  windmills.  And  so  long  as  the  earth  continues  to  revolve 
about  its  axis  the  tides  will  continue  to  ebb  and  flow,  and  these 
may  furnish  us  considerable  quantities  of  power. 

Even  if  it  should  happen  that  none  of  these  sources,  nor  all 
of  them  combined,  should  furnish  quite  such  cheap  power  as  that 
which  we  now  enjoy  through  the  use  of  coal,  still  we  may  become 
so  well  to  do,  through  improved  agriculture,  improved  technical 
processes  for  utilizing  power,  and  more  rational  habits  of  living,  as 
to  enable  us  to  bear  the  extra  cost  of  these  other  kinds  of  power 
with  no  great  inconvenience.  Even  if  this  should  not  happen,  it 
must  not  be  forgotten  that  a  considerable  number  of  civilizations 
have  been  built  up  and  multitudes  of  people  have  lived  comfort- 
ably and  happily  with  no  power  except  that  of  their  own  muscles, 
their  domestic  animals,  the  winds,  and  the  waterfalls. 

The  steam  engine.  Next  to  the  yoking  of  the  ox  at  some  time 
in  the  prehistoric  past  the  most  momentous  event  in  the  history 
of  man's  use  of  power  was  the  invention  of  the  steam  engine. 
The  reason  why  this  was  so  momentous  was  that  the  coal  beds  of 
the  north  temperate  zone  furnish  a  vast  quantity  of  very  cheap  and 
very  concentrated  fuel.  By  merely  vaporizing  water  in  a  boiler  by 
means  of  this  cheap  fuel  great  pressure  can  be  exerted.  This  pres- 
sure can  be  made  to  move  a  piston.  From  this  point  on,  further 
developments  are  merely  the  results  of  mechanical  adjustments. 


90 


ELEMENTARY  ECONOMICS 


Muscular 


Whenever  one  object,  such  as  a  piston,  can  be  made  to  move 
as  we  want  it  to  move,  other  objects  can  be  hitched  to  it  and 
be  made  to  move  also.  The  first  of  these  mechanical  adjust- 
ments to  produce  great  results  was  when  the  moving  piston  was 
made  to  turn  a  wheel,  thus  converting  linear  motion  into  circular 
motion.  After  that  adjustment  was  made  every  form  of  steam- 
driven  machinery  became  a  mechanical  possibility. 

Human  (  Horses 

Mules 

Asses 

Oxen 

Buffaloes 
,  Animal  ■{  Yaks 

Elephants 

Camels 

Llamas 

Dogs 
^  Reindeer 
fWind 

{Streams 
Waves 
Tides 
J  Steam  engines 
\  Internal-combustion  engines 
,  Solar  engines 


Power  i 


EXERCISES 

1.  In  what  does  labor  really  consist? 

2.  Does  this  explain  why  power  is  needed? 

3.  What  are  the  leading  forms  of  power  used  as  an  aid  to  man? 

4.  What  of  the  relative  importance  of  animal  and  mechanical  power  ? 

5.  What  are  the  most  important  forms  of  animal  power? 

6.  What  are  the  most  important  sources  of  mechanical  power? 

7.  What  about  the  future  :  are  our  sources  of  power  likely  to  be 
exhausted  ? 

8.  What   have   been   some   of   the   most   important   events   in   the 
history  of  man's  use  of  power? 


CHAPTER  XI 
CAPITAL 

Instruments  of  production.  Tools  and  machinery  deserve  a 
position  next  in  importance  to  power  as  economizers  of  human 
labor.  In  fact,  power  and  machinery  are  almost  inseparable.  An 
ingenious  and  enterprising  people  will  not  only  develop  many 
sources  of  power  but  will  manage  to  invent  and  make  more  and 
more  instruments  and  contrivances  to  aid  in  production  or  to 
enable  a  given  amount  of  labor  to  produce  more  than  it  could 
possibly  produce  with  fewer  instruments.  This  great  mass  of 
engines,  instruments,  and  contrivances  not  only  aid  greatly  in 
production  but  they  come  also  to  form  a  very  important  part  of 
the  wealth  of  the  nation.  All  wealth  of  this  kind  has  come  to 
be  called  producers'  goods.  All  these  and  other  producers'  goods 
are  called  capital  for  short. 

Producers'  goods  and  consumers'  goods.  This  great  body  of 
instruments  of  production  is  undoubtedly  wealth  in  the  sense 
that  it  is  a  means  of  increasing  well-being.  You  can  truthfully 
say  of  it,  "  More  such  instruments,  more  well-being  for  the  nation  ; 
fewer  of  them,  less  well-being."  But  these  instruments  constitute 
a  special  kind  of  wealth.  They  do  not  satisfy  our  desires  directly ; 
they  help  to  satisfy  them  indirectly  by  enabling  us  to  get  other 
things  that  do  satisfy  our  desires  directly.  Those  goods  that 
satisfy  desires  directly  are  called  consumers'  goods.  For  example, 
plows,  reaping  machines,  flour  mills,  and  ovens  are  producers' 
goods  ;  bread  is  consumers'  goods. 

Raw  materials.  Sometimes,  however,  an  article  which  is  ulti- 
mately destined  for  direct  consumption,  but  is  still  in  the  state 
called  raw  material,  is  regarded  as  capital.  Thus  wheat,  the  inside 
part  at  least,  is  destined  for  the  direct  satisfaction  of  human  de- 
sires when  it  is  made  into  bread.    But  while  it  is  still  in  the  form 

9* 


92  ELEMENTARY  ECONOMICS 

of  wheat  its  owner  does  not  expect  to  get  any  direct  satisfaction 
from  it,  but  to  get  some  money  for  it,  and  with  this  money  he  may 
get  some  consumers'  goods.  He  will  regard  his  wheat  as  capital 
rather  than  as  consumers'  goods.  Again,  after  it  is  made  into 
flour,  so  long  as  the  flour  is  in  the  hands  of  the  miller,  the  dealer, 
or  the  commercial  baker,  it  is  not  regarded  by  its  owner  as  a 
means  of  direct  satisfaction  but  as  a  means  of  getting  an  income. 
All  these  men  will  regard  it  as  capital,  along  with  the  tools,  ma- 
chines, buildings,  and  other  things  used  in  the  business. 

What  is  capital  ?  Capital  may  therefore  be  pretty  broadly 
defined  as  any  kind  of  property,  aside  from  land,  which  a  man  uses 
in  his  business  for  the  purpose  of  getting  an  income.  Even  a  piano 
which  the  owner  rents  for  an  income  and  does  not  use  for  his  own 
pleasure  would  be  called  capital. 

Capital  is  goods.  Let  it  always  be  remembered  that  capital  is 
goods,  not  a  quantity  of  money.  Sometimes,  however  (in  fact, 
usually),  a  man  has  to  have  money  or  purchasing  power  as  a 
means  of  buying  the  engines,  tools,  instruments,  machines,  etc., 
which  make  up  his  capital.  It  is  sometimes  said,  inaccurately, 
that  he  has  transformed  his  money  into  these  other  things  or  that 
he  has  transformed  one  kind  of  capital  into  another.  That  is  not 
true.  He  exchanged  his  money  for  them.  There  was  no  trans- 
formation. This  inaccurate  way  of  thinking  has  sometimes  led 
to  another  inaccuracy ;  namely,  that  of  thinking  of  capital  as  a 
lot  of  money  or  some  kind  of  purchasing  power.  Capital  is 
goods.  Those  goods  have  value  or  purchasing  power,  but  the 
purchasing  power  is  not  the  capital,  it  is  only  the  value  of  the 
capital.  One  might  as  well  say  that  since  every  man  has  weight  or 
height  therefore  man  is  weight  or  height. 

How  wealth  is  measured.  Another  reason  which  leads  er- 
roneously to  thinking  of  capital  as  a  fund  of  value  is  found  in  the 
fact  that  capital,  like  all  wealth,  is  measured  in  terms  of  value  and 
its  quantity  expressed  in  terms  of  money.  There  is  no  good  way 
of  saying  how  much  capital  there  is  in  any  community  or  in  the 
possession  of  any  individual  except  by  saying  It  in  terms  of  money. 
If  any  capitalist  were  asked  how  much  capital  he  possessed,  and 


CAPITAL 


93 


he  were  to  answer  in  terms  of  tons,  or  cubic  feet,  or  yards,  or  any 
other  unit  of  physical  measurement,  he  would  not  convey  any  clear 
or  definite  idea.  Therefore,  if  you  ask  any  business  man  to  state 
how  much  capital  he  uses  in  his  business,  he  can  only  answer  you 
intelligently  by  saying  so  many  dollars  or  so  many  dollars'  worth. 
This  is  a  mere  quantitative  expression.  If,  however,  you  were  to 
ask  him  in  what  his  capital  really  consisted,  he  could  only  answer 
you  intelligently  by  giving  you  an  inventory  of  the  various  goods 
which  make  up  his  fund  of  capital.  The  only  exception  to  this  rule 
would  be  the  money-lender,  whose  capital  consists  solely  of  money. 

Capital  the  result  of  working  and  waiting.  The  next  question 
to  arise  is,  How  does  capital  come  into  existence?  If  it  consists 
of  tools,  buildings,  machines,  equipment,  etc.,  it  is  rather  obvious 
that  they  come  into  existence  because  labor  is  expended  in  pro- 
ducing them.  But  this  does  not  tell  the  whole  story.  In  order 
that  any  community  may  come  into  possession  of  a  larger  stock 
of  tools  and  equipment,  it  must,  temporarily  at  any  rate,  divert  its 
labor  force  from  the  production  of  consumers'  goods  into  the 
production  of  these  producers'  goods.  Some  labor  must  be  put  to 
work  making  tools,  machines,  buildings,  equipment,  etc.,  and  just 
that  much  less  labor  will  be  available  during  that  time  for  the 
production  of  consumers'  goods.  During  this  period  the  com- 
munity will  have  fewer  consumers'  goods  than  it  otherwise  might 
have  had.  Of  course,  the  expectation  is  that  the  tools  and  equip- 
ment, after  they  are  produced  and  put  to  use,  will  again  add  to 
the  total  production.  This,  however,  involves  a  certain  amount  of 
postponement  of  consumption. 

In  a  society  where  things  are  done  by  free  individuals  working 
under  the  system  of  voluntary  agreement,  any  individual  may 
decide  that  he  will  consume  a  little  less  in  the  present  or  the  im- 
mediate future  in  order  that  he  may  have  a  little  more  to  consume 
in  the  distant  future.  The  way  he  does  this  is  to  save  and  invest ; 
that  is,  buy  fewer  consumers'  goods  in  order  that  he  may  buy  more 
producers'  goods,  or  else  to  turn  aside,  as  may  have  been  done  in 
very  simple  states  of  society,  from  the  work  of  gathering  consum- 
ers' goods  in  order  to  apply  himself  to  the  work  of  making  tools. 


94  ELEMENTARY  ECONOMICS 

Making  tools  rather  than  consumers'  goods.  A  primitive 
fisherman  has  frequently  been  used  as  an  illustration  of  this  simple 
process.  He  has  been  in  the  habit  of  catching  fish  with  very  simple 
tackle,  but  he  sees  an  opportunity  of  increasing  his  catch  if  he 
can  only  get  some  kind  of  boat,  so  he  decides  to  spend  a  part  of 
the  time  each  day  in  making  a  boat  instead  of  spending  all  his 
lime  catching  fish.  By  this  combination  of  frugality  and  industry 
he  eventually  comes  into  possession  of  a  boat  which  thereafter 
adds  to  his  income  and  more  than  compensates  him  for  the  fru- 
gality which  he  practiced  during  the  period  in  which  the  boat 
was  building.  The  case  is  doubtless  real  enough  to  serve  as 
an  illustration  of  the  essential  process  of  increasing  the  stock 
of  capital. 

Combination  of  work  and  thrift.  It  has  not  been  many  gen- 
erations since  farmers  used  very  crude  and  simple  implements, 
some  of  which  they  could  make  for  themselves.  The  farmer  who 
made  his  own  plow  was  depriving  himself  of  the  opportunity  for 
amusement,  which  is  a  kind  of  consumption,  or  was  reducing 
somewhat  his  consumption  of  material  goods  during  the  period 
when  the  plow  was  being  made.  After  it  was  finished  it  assisted 
him  in  producing  subsistence  and  added  to  his  income  available  for 
consumption.  This  is  in  all  essential  particulars  similar  to  the 
case  of  the  primitive  fisherman. 

A  little  later,  however,  the  farmer,  instead  of  making  his  own 
plow,  hired  a  blacksmith  to  make  it,  paying  the  blacksmith  money 
for  his  work.  Here  we  have  the  same  combination  of  labor  and 
frugality  as  in  the  other  cases,  the  difference  being  that  in  the 
making  of  the  plow  the  blacksmith  does  the  laboring  and  the 
farmer  exercises  the  frugality.  With  the  money  which  he  paid 
for  the  plow  he  could  have  bought  consumers'  goods  and  had 
immediate  enjoyment.  He  postponed  that  enjoyment  when  he 
paid  the  money  to  the  blacksmith  and  received  the  plow.  In  the 
then  distant  future,  however,  the  plow  added  to  his  income  and 
enabled  him  to  make  up  for  the  loss  of  opportunity  for  immediate 
consumption  and  thus  compensated  him  for  the  postponement 
which  he  underwent  when  he  purchased  the  plow. 


CAPITAL  95 

Investing,  or  buying  producers'  goods  instead  of  consumers' 
goods.  The  modern  farmer,  however,  instead  of  hiring  the  black- 
smith to  make  the  plow  usually  buys  his  plow  ready  made.  So  far 
as  he  is  concerned  the  act  of  frugality  is  the  same  as  though  he 
deliberately  hired  the  blacksmith  to  make  it.  He  surrenders  a 
certain  amount  of  ready  cash  with  which  he  might  have  bought 
consumers'  goods ;  he  receives  the  plow,  which  for  a  period  of 
years  will  add  to  his  income  and  therefore  compensate  him. 

In  the  making  of  the  plow,  however,  there  were  other  tools  used 
as  well  as  labor.  Those  other  tools  had  been  made  in  much  the 
same  way  as  the  plow.  Someone  had  invested  money  in  them 
and  then  hired  other  labor  to  use  the  tools  in  the  making  of  the 
plow.  It  has  become,  therefore,  a  very  complicated  process ;  but 
anyone  who  will  analyze  the  process  will  find  always  the  same 
two  factors  involved;  namely,  waiting  and  working — postpone- 
ment of  consumption  on  the  one  hand,  labor  on  the  other. 
No  capital  can  ever  come  into  existence  without  this  combination. 
The  fact  that  this  combination  always  exists  may  be  obscured  by 
the  intricacies  of  the  modern  industrial  process,  and  it  may  require 
a  little  more  intelligence  and  study  to  see  clearly  where  and  how 
the  frugality  and  the  labor  are  combined  than  are  necessary  when 
studying  the  primitive  fisherman  or  the  old-fashioned  farmer. 

Separation  of  the  functions  of  working  and  waiting.  In  the 
highly  complicated  industrial  system  of  the  present,  with  its  in- 
increase  of  specialization,  the  two  functions  of  waiting  and  work- 
ing are  generally  performed  by  different  persons  and  classes  of 
persons.  This  has  given  rise  to  some  of  the  most  intricate  and 
most  difficult  of  our  social  problems.  The  small  farmer,  for 
example,  who  owns  his  own  land  and  his  own  teams  and  farming 
outfit,  and  who  does  his  own  work,  combines  both  functions. 
"When  he  bought  his  team  and  outfit  out  of  his  own  savings,  he 
had  to  give  up,  for  the  present,  the  means  of  buying  consumers' 
goods ;  that  is,  he  had  to  wait  for  his  consumer's  enjoyment  until 
the  outfit  should  begin  to  earn  him  something.  If,  however,  he 
hires  someone  else  to  do  his  work,  there  is  a  separation  of 
functions. 


96  ELEMENTARY  ECONOMICS 

In  a  simpler  state,  in  which  the  same  individual  exercised  both 
functions,  no  social  or  class  antagonisms  were  developed.  Even  in 
the  intermediate  stage,  when  the  farmer  bought  his  plow  from  the 
blacksmith  and  then  used  it  himself  and  the  blacksmith  bought 
his  own  tools  and  used  them  himself,  we  find  both  functions  per- 
formed by  the  same  individuals.  Class  antagonisms  could  hardly 
develop  under  these  conditions.  But  when,  as  in  the  modern  in- 
dustrial system,  the  capitalist,  especially  if  he  be  a  large  capitalist, 
lives  mainly  from  the  income  of  his  capital  and  the  laborer  mainly 
from  the  income  of  his  labor  (in  other  words,  when  the  two  func- 
tions are  sharply  separated),  class  feeling  and  class  antagonism 
have  developed.  It  has  come  about  in  our  urban  industries  that 
the  average  person  who  performs  manual  labor  receives  his  wages 
in  weekly  installments  and  spends  them  mainly  for  consumers' 
goods,  whereas  the  very  tools  with  which  he  works  are  owned  by 
other  men  who  have  specialized  in  the  function  of  investing  their 
money ;  that  is,  in  buying  capital,  or  tools  and  equipment. 

Separation  of  the  function  of  the  laborer  and  the  capitalist. 
Capital  has  existed,  of  course,  as  long  as  tools  and  equipment  have 
existed,  but  this  separation  of  the  two  functions,  that  of  the  laborer 
and  that  of  the  capitalist,  has  become  general  only  since  the  rise 
of  machine  production.  Before  that  time  the  function  of  the 
capitalist  was  not  important  enough  to  create  an  opportunity  for 
many  men  to  live  exclusively  by  the  performance  of  this  function. 
Not  enough  capital  was  needed  in  the  primitive  forms  of  industry 
which  preceded  the  present  forms  to  enable  a  large  number  of 
men  to  live  on  its  earnings. 

It  is  this  fact  which  is  probably  meant  when  it  is  erroneously 
stated  that  capital  in  the  modern  sense  came  into  existence  with 
the  rise  of  machinery.  Capital  in  the  modern  sense  does  not  differ 
from  capital  in  the  former,  or  capital  in  the  ancient,  sense ;  it 
differs  only  in  the  sense  that  there  is  more  of  it  and  that  much 
more  is  needed.  This  combination  of  facts — the  fact  that  more  of 
it  is  needed  than  ever  before  and  that  there  is  more  of  it  supplied 
than  ever  before — has  created  what  we  call  the  capitalist  class  in 
modern  industry,  and  that  is  a  matter  of  importance. 


CAPITAL  97 

Coordinating  labor  which  is  performed  at  different  times. 
In  a  somewhat  special  but  very  important  sense  we  may  say  that 
the  function  of  the  investor  is  to  aid  in  production  by  coordinat- 
ing labor  which  is  performed  at  different  times.  In  the  chapter  on 
The  Division  of  Labor  it  was  pointed  out  that  there  are  two  dis- 
tinct forms  of  the  division  of  labor  ;  namely,  the  contemporaneous 
and  the  successive.  Under  our  modern  industrial  system  the  suc- 
cessive division  of  labor  has  been  greatly  lengthened  out.  In  some 
cases  many  years  elapse  between  the  beginning  of  a  process  and 
the  final  completion  of  the  production  of  a  consumable  article,  as 
when  mines  are  opened,  ore  smelted,  factories  built  and  equipped, 
long  before  we  can  begin  to  enjoy  the  products  of  the  factories. 
There  is  a  striking  analogy  between  the  lengthening  out  of  the 
successive  division  of  labor  and  the  widening  out  of  the  contem- 
poraneous division  of  labor.  The  latter  has  been  brought  about 
through  improved  means  of  communication  and  transportation.  It 
is  literally  true  at  the  present  time  that  thousands  of  miles  or  even 
half  the  earth's  circumference  may  separate  men  who  are  working 
for  the  production  of  the  same  article.  The  coordination  of  labor 
performed  at  such  widely  separated  points  of  space  is  one  of  the 
most  important  and  striking  aspects  of  the  modern  industrial  sys- 
tem. It  is,  however,  no  more  important  or  striking  than  the 
similar  coordination  which  has  taken  place  between  labor  per- 
formed at  widely  separated  points  of  time.  Anyone  who  cares  to 
investigate  this  needs  only  to  find  out  how  long  ago  the  mills  were 
built  in  which  the  flour  was  ground  which  entered  into  the  bread 
which  he  ate  for  dinner,  or  the  factories  in  which  his  clothes  or 
his  shoes  were  manufactured.  Even  the  hides  from  which  his  shoes 
are  made  grew  on  animals  that  were  born  several  years  ago. 

There  are  various  ways  in  which  this  coordination  of  labor 
performed  at  different  times  may  be  presented  to  the  mind.  In  a 
primitive  state  of  industry'  each  unit  of  labor  was  performed  by 
men  working  with  few  and  simple  tools.  The  tools  may  be  said  to 
represent  labor  performed  in  previous  times.  When  the  worker 
uses  tools,  his  work  in  the  present  time  is  coordinated  with  the 
work  of  the  man  who  made  the  tools.    But  since  the  tools  were 


98  ELEMENTARY  ECONOMICS 

very  few  and  simple,  it  would  be  correct  to  say  that  a  given  unit 
of  present  labor  was  being  coordinated  with  a  very  small  amount 
of  past  labor. 

Under  modern  conditions  the  average  laborer  is  using  more 
tools,  as  well  as  larger  and  more  complicated  machinery,  than  were 
used  by  the  primitive  laborer.  These  large  and  complicated 
machines,  like  the  primitive  tools,  represent  labor  performed  at  a 
previous  time.  The  labor  of  the  workmen  using  them  is  literally 
being  coordinated  with  the  labor  of  the  men  who  made  the  ma- 
chines. Since  the  tools  are  so  numerous,  costly,  and  complicated, 
it  is  correct  to  say  that  a  given  unit  of  present  labor  is  being 
coordinated  with  a  large  amount  of  past  labor. 

Lengthening  the  process  of  production.  In  order  that  there 
may  be  factories,  mines  must  be  opened  and  ore  extracted.  Ore 
must  then  be  smelted  and  purified  into  iron  and  steel  and  made 
into  machinery.  But  no  one  wants  machinery  for  its  own  sake, 
any  more  than  he  wants  ore  or  pig  iron.  Machines  are  wanted 
only  as  they  will  help  to  produce  things  desirable  for  their  own 
sake.  It  is  this  constant  looking  ahead  and  taking  thought  for  the 
future,  accompanied  by  the  postponing  of  present  consumption  in 
favor  of  future  consumption,  that  makes  possible  the  coordination 
of  labor  performed  at  different  times. 

Combination  of  factors.  Something  more  than  frugality,  thrift, 
and  foresight  are  necessary,  however.  Without  mechanical  in- 
genuity, however  frugal,  thrifty,  and  farsighted  a  person  might 
be,  he  would  find  it  difficult  to  exercise  these  qualities  profit- 
ably. Unless  someone  were  able  to  invent  superior  methods  of 
production  which  required  the  exercise  of  those  qualities,  they 
would  be  of  comparatively  little  economic  advantage  to  those  who 
possessed  them. 

Here  we  have  an  example  of  a  class  of  cases  which  continually 
perplex  the  amateur  student  of  economics.  There  are  cases  where 
two  or  more  factors  are  absolutely  necessary  to  get  a  given  result. 
Fundamentally  the  problem  is  no  more  obscure  than  that  in- 
volved in  the  formula  2x3  =  6.  The  students  will  agree  that  2  is 
just  as  essential  as  3,  and  3  as  essential  as  2,  in  getting  6. 


CAPITAL  99 

In  the  higher  realms  of  economics  we  find  numerous  examples  of 
the  same  problem.  Forethought  and  inventiveness  are  examples  of 
mental  qualities  which  are  combined  to  secure  mechanical  progress. 
However  inventive  men  may  be  in  contriving  mechanical  improve- 
ments, unless  someone  is  willing  to  perform  labor  long  in  advance 
of  any  useful  result,  or  pay  someone  else  for  performing  that  labor, 
all  these  mechanical  contrivances  will  remain  either  in  the  brains 
of  the  inventors  or  in  museums. 

The  productivity  of  capital.  There  are  some  extreme  socialists 
who  deny  that  the  capitalist  performs  any  necessary  function.  If 
that  were  true,  it  would  be  hard  to  frame  an  argument  to  show 
that  society  as  a  whole  should  do  precisely  what  the  capitalist 
is  doing.  The  socialist  would  then  have  to  admit  that  the  capi- 
talist, instead  of  performing  a  useless  function,  performs  a  most 
important  one, — so  important  that  society  as  a  whole  should  take 
it  over.  To  say  that  society  should  do  its  own  investing  is  to  say 
that  it  should  become  its  own  capitalist.  This  would  present  a 
question  to  be  debated.  The  question  would  be,  Can  the  useful 
function  of  coordinating  labor  performed  at  different  times  be 
done  more  economically  and  satisfactorily  by  the  community 
than  by  private  individuals  ? 

EXERCISES 

1.  What  is  the  difference  between  producers'  goods  and  consumers' 
goods  ? 

2.  Are  producers'  goods  growing  in  volume  and  importance ?    Why? 

3.  What  is  capital? 

4.  Why  is  capital  sometimes  spoken  of  as  though  it  were  money? 

5.  How  does  capital  come  into  existence? 

6.  Would  our  stock  of  tools  and  machinery  increase  unless  some 
of  us  were  thrifty  enough  to  buy  them  instead  of  spending  all  our 
money  for  consumers'  goods  ? 

7.  In  what  sense  does  the  buyer  of  producers'  goods  help  in  the 
successive  division  of  labor  as  described  in  Chapter  IX  ? 

8.  WTiat  is  meant  by  lengthening  the  process  of  production? 

9.  What  is  meant  by  the  productivity  of  capital  ? 


CHAPTER  XII 
THE  ORGANIZATION  OF  BUSINESS 

Large  capital  necessary.  The  growth  of  machine  production 
has  made  necessary  such  large  aggregations  of  capital  as  to  require 
the  combined  accumulations  of  numbers  of  men.  In  comparatively 
few  cases  does  a  single  individual  possess  enough  wealth  to  equip 
a  modern  factory,  railroad,  steamship  company,  mine,  or  even  a 
large  mercantile  house.  Were  it  not  possible  to  combine  the  wealth 
of  a  number  of  individuals,  large-scale  production  would  be  the 
privilege  of  only  a  few  very  wealthy  men. 

Methods  of  combining  capital.  There  are  three  distinct 
methods  of  combining  wealth  in  business :  one  is  known  as  the 
partnership ;  another  is  the  corporation^  or  joint-stock  company ; 
and  the  third  is  the  cooperative  society.  The  partnership  is  a 
simple  combination  of  two  or  more  individuals  in  the  ownership 
and  management  of  a  given  business,  in  which  each  partner  is  fully 
responsible  for  the  acts  and  liabilities  of  the  group.  The  partner- 
ship is  merely  an  enlargement  of  the  individual.  The  individual 
who  owns  and  operates  his  own  business  is,  of  course,  fully  re- 
sponsible for  all  debts  and  obligations,  and,  subject  to  bankruptcy 
and  homestead  laws,  all  his  property  may  be  taken  in  payment  of 
any  obligation  incurred  in  the  business.  Where  two  or  more  men 
join  together  in  a  partnership  each  partner  is  responsible  in  the 
same  sense  and  to  the  same  extent  as  he  would  be  if  he  were  the 
sole  owner. 

Difficulties  of  partnership.  Obviously  a  partnership  on  these 
terms  is  possible  only  among  men  who  are  very  intimately  ac- 
quainted with  one  another  and  who  have  complete  confidence  in 
one  another.  Since  each  partner  is  fully  responsible  for  the  acts 
of  every  other,  so  far  as  they  are  concerned  with  the  business,  it 
would  be  extremely  hazardous,  not  to  say  foolhardy,  for  anyone 


THE  ORGANIZATION  OF  BUSINESS  loi 

to  form  a  partnership  with  an  individual  with  whom  he  was  not 
intimately  acquainted  and  concerning  whose  honesty  and  ability 
he  had  the  slightest  suspicion.  Incompetent  or  dishonest  partners 
have  caused  the  financial  ruin  of  many  an  otherwise  sound  and 
capable  business  man. 

The  corporation.  The  modern  expansion  of  business  would 
hardly  have  been  possible  without  some  form  of  organization 
which  would  permit  the  association  of  larger  numbers  of  men  than 
are  possible  under  a  partnership.  This  has  given  rise  to  the  cor- 
poration, or  the  joint-stock  company.  The  distinguishing  differ- 
ence between  the  corporation  and  the  partnership  lies  in  what  is 
known  as  limited  liability.  In  a  corporation  the  liability  of  each 
shareholder  is  strictly  limited.  The  corporation  may  become  bank- 
rupt, but  the  individual  members  or  shareholders  can  be  called 
upon  only  for  definite  sums  to  make  good  the  debts  of  the  cor- 
poration. In  the  ordinary  case  each  individual  puts  a  certain 
sum  of  money  into  the  fund.  This  may  be  lost,  but  he  cannot 
be  called  upon  for  additional  simis  to  make  good  further  losses. 
In  other  cases,  such  as  our  national  banks,  the  shareholder 
may  not  only  lose  what  he  put  into  the  fund  but  may  be 
assessed  an  equal  amount  in  addition.  This  is  sometimes  called 
double  liability. 

Suppose,  for  example,  it  were  considered  necessary  to  have 
$100,000  of  capital  with  which  to  start  a  business.  This  capital 
may  be  divided  into  a  thousand  shares  of  $100  each.  (A  larger 
number  of  shares  of  smaller  denomination  or  smaller  number  of 
larger  denomination  may,  of  course,  be  decided  upon.)  These 
shares  are  represented  by  bits  of  printed  paper  which  serve  as 
evidence  to  show  that  the  money  has  been  put  into  the  fund. 
A  thousand  different  individuals  may  buy  one  share  each,  or 
a  smaller  number  may  each  buy  a  different  number  of  shares. 

For  each  Si 00  which  any  individual  puts  in,  he  receives  one  of 
these  bits  of  paper,  which  come  to  be  called  shares  or  stock  certifi- 
cates or  some  other  such  name.  After  the  shares  are  all  sold, 
there  is  the  fund  of  $100,000  in  money  available  for  starting  the 
business. 

UNIVERSTTY  r^  C*J  TFORNIA 


102  ELEMENTARY  ECONOMICS 

The  general  rule  is  that  each  contributor  shall  have  a  vote  for 
each  share  which  he  has  purchased.  It  would  therefore  be  pos- 
sible for  one  individual  to  own  more  than  half  the  shares,  pro- 
vided he  had  invested  more  than  $50,000  in  the  enterprise.  Owning 
more  than  half  the  shares,  he  could  always  cast  the  majority 
vote  and  control  the  corporation,  electing  himself  and  his  particu- 
lar friends  to  all  the  offices,  and  virtually  controlling  the  busi- 
ness. In  some  cases,  however,  such  a  concentration  of  ownership 
is  not  permitted. 

Limited  liability.  Only  the  officers  of  the  corporation  are 
empowered  to  act  for  the  corporation ;  the  individual  shareholder 
who  is  not  an  officer  has  no  power  to  obligate  the  corporation  in 
any  way.  One  therefore  does  not  need  to  scrutinize  the  solvency 
or  the  character  of  his  fellow  shareholders  as  closely  as  would  be 
necessary  in  a  partnership.  Again,  the  individual  shareholder  has 
no  responsibility  for  the  acts  of  the  corporation  beyond  that  which 
has  already  been  indicated ;  that  is,  if  the  business  fails,  the  af- 
fairs of  the  corporation  may  be  wound  up,  but  he  can  lose  only  the 
sum  which  he  originally  subscribed,  or,  in  the  case  of  double 
liability,  that  sum  plus  an  equal  sum. 

Some  weaknesses  of  the  corporation.  This  device  of  the  joint- 
stock  company  with  limited  liability  has  made  possible  the  bring- 
ing together  of  vast  sums  of  capital  running  up  into  millions  and 
hundreds  of  millions  of  dollars,  for  the  purpose  of  carrying  on 
great  business  enterprises.  Individuals  who  never  saw  or  heard 
of  one  another,  living  in  different  parts  of  the  country,  sometimes 
in  different  parts  of  the  world,  may  own  shares  in  the  same  cor- 
poration, having  contributed  their  money  to  the  joint  fund  for  the 
purchase  of  the  capital  needed  in  the  business. 

This  has  been  one  of  the  great  factors  in  building  up  modem  in- 
dustry. It  is  almost  as  important  as  some  of  the  great  mechanical 
inventions.  But,  like  all  great  inventions,  it  carries  with  it  certain 
difficulties.  For  example,  it  has  made  individual  enterprise  a  prac- 
tical impossibility,  except  in  those  cases~"^ere  small-scale  pro- 
duction is  as  efficient  as  large-scale  production.  On  the  other 
hand,  it  has  given  individuals  with  only  small  sums  of  capital  to 


THE  ORGANIZATION  OF  BUSINESS  103 

invest  the  opportunity  to  participate  in  the  profits  of  large-scale 
production.  In  the  latter  sense  it  has  been  a  democratic  institution. 
The  fact,  however,  that  individuals  vote  in  proportion  to  the  num- 
ber of  shares  which  they  own  has  tended  to  destroy  some  of  the 
democracy  and,  in  some  cases  at  least,  to  put  the  management  of 
the  corporation  into  the  hands  of  a  plutocratic  oligarchy.  A  few 
large  shareholders,  who  control  the  majority  of  the  stock,  can  con- 
trol the  corporation  sometimes  even  to  the  disadvantage  of  the 
small  shareholders.  \'arious  limitations  upon  the  voting  power 
have  been  proposed  and  adopted  for  the  purpose  of  limiting  the 
power  of  the  large  shareholders.  In  spite  of  these,  however,  many 
a  fortune  has  been  built  up  in  the  past  through  the  scheming  of 
large  shareholders. 

Multiplied  power  and  divided  responsibility.  In  any  large  body 
of  men,  whether  it  be  a  mob  or  a  corporation,  if  the  members  are 
all  moved  by  a  common  impulse  they  are  likely  to  have  a  sense  of 
power  proportionate  to  their  numbers,  and  at  the  same  time  the 
very  fact  of  numbers  diminishes  each  man's  sense  of  responsibility. 
That  is  why  the  mob  is  so  like  a  monster,  for  the  difference  be- 
tween a  man  and  a  monster  is  precisely  that, — the  monster  feels 
a  sense  of  power  and  not  a  sense  of  responsibility. 

Something  of  the  same  kind  exists  in  the  case  of  the  industrial 
corporation.  There  also  you  have  increased  power  and  diminished 
responsibility.  Most  of  the  evils  ^TcorpoTation  practice  grow  out 
ofthis  simple  situation,  and  the  remedy  must  be  applied  at  this 
point.  The  sense  of  responsibility  must  be  made  commensurate 
with  the  sense  of  power. 

Size  a  matter  of  importance.  If  the  principle  we  have  laid 
down  is  sound,  it  furnishes  no  support  to  the  view  that  the  mere 
bigness  of  a  corporation  is  not  a  matter  for  the  law  to  take  into 
account.  From  our  point  of  view  bigness  is  an  important  factor 
in  the  problem,  for  the  bigger  the  corporation  the  greater  its  power 
and  the  less  the  sense  of  responsibility  on  the  part  of  each  member. 
That  situation  alone  calls  more  and  more  for  strict  regulation  and 
enforcement  of  responsibility.  Its  increased  power  is  a  good 
thing,  provided  that  power  be  used  for  production  and  not  for 


104  ELEMENTARY  ECONOMICS 

destruction ;  but  there  is  no  certainty  that  it  will  be  used  exclu- 
sively for  production  unless  it  is  subject  to  the  strictest  control. 

This  does  not  mean  that  large  corporations  have  worse  dispo- 
sitions than  small,  or  that  their  members  are  worse  men  than  the 
members  of  small  corporations  or  partnerships.  It  means  only  that 
the  disproportion  between  power  and  responsibility  increases  with 
the  size  of  the  corporation. 

As  a  homely  illustration  of  the  importance  of  size,  let  us  take 
the  common  house  cat,  whose  diminutive  size  makes  her  a  safe 
inmate  of  our  households  in  spite  of  her  playful  disposition  and  her 
liking  for  animal  food.  If,  without  the  slightest  change  of  char- 
acter or  disposition,  she  were  suddenly  enlarged  to  the  dimensions 
of  a  tiger,  we  should  at  least  want  her  to  be  muzzled  and  to  have 
her  claws  trimmed  ;  while  if  she  were  to  assume  the  dimensions  of 
a  mastodon,  I  doubt  if  any  of  us  would  want  to  live  in  the  same 
house  with  her.  And  it  would  be  useless  to  argue  that  her  nature 
had  not  changed,  that  she  was  just  as  amiable  as  ever,  and  no 
more  carnivorous  than  she  always  had  been.  Nor  would  it  con- 
vince us  to  be  told  that  her  productivity  had  greatly  increased  and 
that  she  could  now  catch  more  mice  in  a  minute  than  she  formerly 
could  in  a  week.  We  should  be  afraid  lest,  in  her  large-scale  mouse- 
catching,  she  might  not  always  discriminate  between  us  and  mice. 

Stratification  of  society.  There  is  another  problem,  not 
strictly  a  corporation  problem,  but  a  social  problem  growing 
out  of  the  prevalence  of  the  corporate  form  of  industrial 
organization.  That  is  the  problem  of  the  widening  gap  between 
employers  and  employed  or,  more  strictly,  between  capitalists 
and  laborers.  It  may  be  laid  down  as  a  general  social  law  that 
anything  which  separates  people  into  sharply  distinguishable 
groups,  whether  it  be  a  geographical  boundary,  a  racial  dif- 
ference, a  difference  of  religious  creeds,  or  a  class  distinction,  will 
produce,  between  the  groups  thus  separated,  first  ignorance  of  one 
another,  then  suspicion  growing  out  of  that  ignorance,  then  mis- 
understanding growing  out  of  that  ignorance  and  suspicion,  and 
finally  open  warfare  whenever  a  pretext  is  found ;  whereas  any- 
thing which  bridges  over  these  gaps,  or  brings  people  together 


THE  ORGANIZATION  OF  BUSINESS  105 

regularly  and  normally,  creates,  first,  knowledge  of  one  another, 
then  confidence  instead  of  suspicion,  then  understanding  instead 
of  misunderstanding,  and  finally  lasting  peace  because  no  difficulty 
seems  large  enough  to  serve  as  a  pretext  for  war. 

Now  the  joint-stock  form  of  organization,  though  a  most  effec- 
tive industrial  device,  has  had  at  least  one  serious  social  result : 
it  has  widened  somewhat  the  gap  which  would  otherwise  have 
existed  between  the  employing  group  and  the  employed  group. 
When  employers  are  known  as  persons  having  Christian  names, 
and  can  come  in  some  kind  of  personal  or  direct  contact  with 
employees,  and  when,  therefore,  employer  and  employee  know 
something  about  one  another,  there  can  be  no  such  degree  of  sus- 
picion of  one  another  as  now  exists ;  where  ignorance  disappears, 
suspicion  tends  to  disappear  also.  But  when  employers  stand,  as 
the  shareholders  of  a  corporation,  in  a  purely  impersonal  relation 
to  employees,  when  the  average  employer  or  shareholder  knows 
nothing  personal  about  the  laborers,  and  the  laborers  know  noth- 
ing about  the  shareholding  employers,  there  is  on  either  side  of 
the  line  about  as  great  a  degree  of  ignorance  of  those  on  the  other 
side  as  can  be  found  anywhere  in  modern  social  life. 

Widening  the  gap  between  social  classes.  Such  a  state  of 
things  has  never  failed  in  the  history  of  the  world  to  produce  sus- 
picion, jealousy,  misunderstanding,  and,  on  the  slightest  pretext, 
open  hostility ;  and,  so  far  as  we  are  able  to  see  into  the  future, 
there  is  not  the  slightest  ground  for  hoping  that  such  a  condition 
ever  will  fail  to  produce  these  same  undesirable  results.  In  other 
words,  we  need  not  hope  for  social  peace,  or  for  stopping  the 
conflict  of  classes,  until  that  chasm  is  in  some  way  bridged  over 
or  made  to  disappear. 

This  result  can  hardly  be  achieved  by  doing  away  with  joint- 
stock  corporations.  They  are  so  effective  as  industrial  devices 
that  we  could  scarcely  get  along  without  them  ;  nevertheless,  if  we 
are  ever  to  have  anything  resembling  social  peace,  some  way  must 
be  found  to  bring  the  employing  classes  and  the  employed  into  per- 
sonal relationships  one  with  another.  The  ideal  is  undoubtedly  that 
of  having  the  workers  in  our  industrial  establishments  purchase 


io6  ELEMENTARY  ECONOMICS 

the  stock  of  the  corporations.  If  that  result  could  possibly  be 
achieved,  there  would  be  an  end  of  the  present  phase  of  warfare. 

The  trust.  It  is  important  that  we  distinguish  between  the 
corporation,  as  we  have  just  described  it,  and  the  trust,  or  combine. 
The  corporation  is  an  organization  of  individuals  who  put  their 
capital  together  in  order  to  carry  on  a  business  which  requires 
more  capital  than  is  likely  to  be  possessed  by  any  one  of  them. 
The  trust,  or  combine,  is  mainly  an  organization  of  corporations 
(though  it  may  include  also  a  few  individual  capitalists),  for  the 
purpose  of  controlling  the  market.  WTiile  such  organizations  are 
to  be  distinguished  sharply  from  corporations  as  such,  nevertheless 
they  could  scarcely  have  come  into  existence  if  the  corporation 
had  not  preceded  them  and  prepared  the  way.  They  may  therefore 
be  called  extreme  developments  of  the  corporation  idea,  though 
not  necessary  developments.  As  to  these  extreme  developments 
of  the  corporation  principle,  it  is  becoming  more  and  more  appar- 
ent that  their  power  for  evil  lies  wholly  in  their  power  of  con- 
trolling and  manipulating  prices.  If  that  power  could  be  taken 
out  of  their  hands,  we  should  then  have  nothing  to  fear  from  them. 

Control  of  prices.  If  they  could  not  succeed  and  survive  in 
competition  through  their  power  over  prices,  they  could  then  suc- 
ceed only  through  their  power  of  production.  If  they  should  then 
survive,  the  mere  fact  of  their  survival  would  prove  their  fitness  to 
survive.  This  has  been  pointed  out  many  times  by  scholars  ;  but 
the  practical  politicians,  with  their  unerring  instinct  for  the  wrong 
way,  have  ignored  it  and  have  been  trying  various  hard  and  useless 
methods  of  dealing  with  the  problem.  Eventually,  after  having 
tried  every  possible  way  of  going  wrong,  we  shall  apply  the  simple 
and  direct  remedy  of  government  control  of  prices~Wherever  a 
monopoly  exists. 

It  is  not  necessary  to  indulge  in  any  sentimental  rhapsodies  on 
the  subject  of  the  people  and  their  control  over  affairs  of  this 
kind.  Government  affairs  are  controlled  by  politicians,  and  poli- 
ticians are  no  more  interested  in  the  people  than  are  the  trust 
magnates  themselves.  The  choice  is  a  hard  one.  But  where  com- 
petition fails  to  regulate  prices,  these  prices  are  certain  to  be  fixed 


THE  ORGANIZATION  OF  BUSINESS  107 

arbitrarily  by  someone.  In  the  absence  of  government  control 
they  are  fixed  by  the  trust  operators  alone.  Where  there  is  govern- 
ment control,  they  are  fixed  partly  by  the  politicians  and  partly  by 
the  trust  operators.  The  interests  of  these  two  groups  are  not  the 
same,  and,  as  the  result  of  their  pulling  and  hauling,  prices  will 
not  be  fixed  quite  so  completely  in  the  interest  of  either  group, 
but  more  in  the  interest  of  the  people,  than  if  the  prices  were  fixed 
by  either  group  alone.  The  people  can  exercise  a  partial  control 
over  the  trusts  by  refusing  to  buy  from  them,  and  over  the  poli- 
ticians by  refusing  to  vote  for  them.  Through  both  methods  of 
control  the  interests  of  the  people  will  be  somewhat  better  safe- 
guarded than  through  either  method  alone. 

Incidentally  this  would  destroy  most  of  the  trusts.  No  trust 
exists  by  virtue  of  its  superior  productive  powers.  Each  one  de- 
pends for  its  existence  upon  its  superior  power  in  buying  or  sell- 
ing ;  that  is,  upon  its  power  over  prices.  Take  away  this  power, 
and  enable  the  outside  concerns  to  match  their  productivity  with 
that  of  the  trust,  and  outside  competition  will  increase  and  force 
the  trust  to  break  up  into  its  most  efficient  productive  units,  as 
distinguished  from  the  most  efficient  bargaining  units. 

The  cooperative  society.  It  has  often  been  proposed  to  sub- 
stitute a  radically  different  form  of  business  organization  for  the 
corporation,  or  joint-stock  company.  This  is  known  as  the  co- 
operative society.  In  a  sense  the  corporation  itself  is  cooperative, 
but  it  differs  from  the  cooperative  society  in  two  fundamental  char- 
acteristics :  In  the  first  place,  the  corporation  involves  cooperation 
amongthg_iiwiiers,_whereas  the  true  cooperative  society  involves 
cooperation  among  the  workers.  In  the  chapter  on  Capital  we  saw 
that  the  rise  of  modern  industrial  conditions  had  brought  about  a 
sharp  separation  of  owners  and  workers.  In  the  original  form  of 
manufacturing — that  is,  the  small  shop,  where  the  workman  owned 
the  shop  and  the  tools — we  had  the  functions  of  ownership  and  of 
labor  combined  in  the  same  individual.  With  the  rise  of  the  fac- 
tory system  these  two  functions  were  separated.  The  corporation 
represents  the  organization  of  owners  and  maintains  the  separation 
of  owners  from  workers.    The  cooperative  society,  on  the  other 


io8  ELEMENTARY  ECONOMICS 

hand,  represents  an  association  of  workers.  Under  the  corporation, 
ownership  and  management  go  together ;  under  the  cooperative 
society,  labor  and-management  go  together.  In  the  second  place, 
in  a  corporation,  as  we  have  seen,  the  various  individuals  who 
contribute  capital  vote  in  proportion  to  the  number  of  shares  which 
they  own.  In  a  cooperative  society  each  individual  has  one  vote, 
regardless  of  the  number  of  shares  which  he  owns  or  the  amount  of 
capital  which  he  has  put  in.  One  man  one  vote  is  the  rule  here, 
whereas  one  share  one  vote  is  the  rule  of  the  corporation. 

As  to  the  comparative  merits  of  these  two  forms  of  organization, 
the  opinion  of  the  world  is  somewhat  divided.  It  must  be  ad- 
mitted that  the  corporation  has  had  much  the  larger  growth, 
though  in  recent  years  the  cooperative  society  has  been  gaining 
ground  rapidly. 

Comparative  merits  of  the  corporation  and  the  cooperative 
society.  It  is  the  opinion  of  the  present  writer  that  the  question 
will  always  be  decided  on  rather  definite  economic  grounds.  Where 
the  difficult  problem  is  that  of  getting  sufficient  capital,  he  who 
supplies  the  capital  must  be  given  control ;  that  is  to  say,  where 
everything  else  is  easily  obtainable,  where  there  are  always  plenty 
of  laborers  seeking  employment,  plenty  of  raw  material  to  be  had, 
and  buyers  ready  to  buy  the  finished  product,  but  where  the  limit- 
ing factor  is  capital  and  the  puzzling  thing  is  to  know  where  to 
get  capital,  favorable  terms  must  be  offered  to  the  capitalist  and 
he  must  be  allowed  to  have  his  way,  otherwise  the  capital  cannot 
be  secured.  In  the  early  stages  of  manufacturing  expansion 
capital  was  the  limiting  factor. 

The  limiting  factor  will  dominate.  Now  and  then  conditions 
arise  under  which  capital  is  not  the  limiting  factor.  Among  farmers, 
for  example,  where  a  creamery  is  needed,  it  is  never  very  difficult 
to  raise  capital  enough  to  equip  the  creamery ;  the  difficulty  is  to 
get  business, —  that  is,  to  get  the  farmers  to  produce  the  milk  for 
the  creamery.  In  these  cases  the  producer  of  milk  must  be  placated 
and  persuaded  to  join  the  organization.  He  must  therefore  be 
given  control.  This  gives  rise  to  what  is  known  as  the  cooperative 
creamery,  in  which  the  producing  farmers  own  the  plant,  direct 


THE  ORGANIZATION  OF  BUSINESS  109 

its  management,  and  share  in  its  profits.  Such  a  creamery,  how- 
ever, is  cooperative  only  in  a  special  sense.  The  men  who  work  in 
the  creamery  are  employed  as  other  laborers  would  be  employed 
in  a  privately  owned  factory  of  any  kind. 

A  cooperative  store  is  dependent  upon  custom.  It  is  easier  to 
get  capital  and  to  hire  clerks  and  salesmen  than  it  is  to  induce 
people  to  trade  at  the  store.  Therefore  the  patrons  of  the  store 
must  be  given  some  control. 

The  great  cooperative  societies,  as  pointed  out  in  the  chapter  on 
Cooperation,  have  been  societies  where  cooperative  buying  and 
selling  were  substituted  for  competitive  buying  and  selling ;  that 
is,  they  have  been  mercantile  societies.  They  do  not  represent  co- 
operation among  producers  or  among  the  workers  in  the  stores  and 
factories,  for  the  workers  in  the  stores  and  factories  are  hired  on 
the  same  terms  as  workers  in  the  privately  owned  or  corporation- 
owned  stores  and  factories. 

There  are  a  few  cases  of  real  cooperation,  but  they  are  not  very 
conspicuous.  The  only  real  cooperation  is  cooperation  among 
workers,  where  the  men  who  do  the  work  in  a  factory  manage  it 
themselves  or  direct  its  management  and  furnish  or  hire  the  capi- 
tal. This  form  of  cooperation  has  not  yet  proved  very  successful, 
mainly  because  labor  has  seldom  been  the  limiting  factor.  It  is 
generally  so  easy  to  get  labor  that  the  laborer  does  not  have  to  be 
given  much  control.  When  the  time  comes,  as  it  probably  will, 
when  labor  is  scarce  and  hard  to  find,  when  it  is  harder  to  per* 
suade  the  laborer  to  work  than  to  persuade  the  capitalist  to  invest 
or  the  purchaser  to  buy  the  finished  products, — then  we  may 
expect  that  this  form  of  cooperation  will  gain  ground. 

Control  by  the  indispensable  person.  Generally  speaking,  the 
indispensable  man,  whether  he  be  the  one  who  furnishes  capital, 
the  one  who  furnishes  raw  material  (as  in  the  case  of  the  cooper- 
ative creamery),  the  one  who  buys  the  finished  product  (as  in 
the  case  of  the  cooperative  store),  or  the  one  who  supplies  the 
labor  (as  in  the  case  of  the  true  cooperative  society),  is  in  so 
strong  a  position  that  he  can  dictate  terms  to  all  the  others. 
WTien  the  laborer  becomes  so  indispensable  —  that  is,  so  scarce 


no  ELEMENTARY  ECONOMICS 

and  hard  to  find  that  the  average  business  enterprise  must  wait 
on  his  will — he  will  be  in  so  strong  a  position  that  he  can  bargain 
on  equal  terms  with  all  the  others  who  participate  in  the  enter- 
prise. He  will  then,  without  resort  to  force,  really  have  a  part  in 
directing  its  management  on  a  purely  voluntary  basis. 

There  is  not  a  very  good  prospect  for  cooperation  among  labor- 
ers under  any  other  conditions.  There  is  a  strong  probability 
that,  with  the  rapid  accumulation  of  capital  (especially  if  habits 
of  frugality  and  saving  are  encouraged),  there  will  come  a  time 
when  capital  will  be  in  danger  of  unemployment  because  of  its 
great  abundance,  and  every  individual  laborer  will  become  almost 
indispensable  because  of  the  scarcity  of  labor.  Then  we  must  ex- 
pect that  capital  will  lose  the  power  to  direct  exclusively  the 
management  of  industries  and  will  take  the  position  of  a  hireling. 
The  laborer  will  then  gain  control  and  assume  the  position  of  the 
master. 

EXERCISES 

1.  Why  is  it  necessary  to  combine  the  wealth  of  large  numbers  of 
men  in  modern  business? 

2.  What  are  the  principal  methods  of  combining  this  wealth? 

3.  What  are  the  disadvantages  of  the  partnership? 

4.  Would  it  be  possible  for  several  hundred  or  several  thousand  men 
to  work  together  in  a  partnership  ?    Why  not  ? 

5.  How  does  a  corporation  differ  from  a  partnership? 

6.  What  are  the  advantages  of  the  corporation? 

7.  What  is  meant  by  limited  liability  ? 

8.  What  is  meant  by  a  trust?    What  is  its  purpose? 

9.  How  does  a  cooperative  society  differ  from  a  joint-stock  cor- 
poration ? 

10.  What  are  the  comparative  merits  of  the  corporation  and  the 
cooperative  society? 


CHAPTER  XIII 
THE  ECONOMICAL  USE  OF  LABOR  ON  LAND 

Fertility  and  location.  Land  is,  of  course,  one  of  the  original 
and  fundamental  necessities  of  national  life.  Some  of  the  most 
necessary  qualities  of  land,  however,  are  as  free  as  air  and  sunlight. 
Land,  for  example,  must  possess  a  certain  degree  of  solidity  to 
support  ourselves  and  our  buildings,  but  one  can  find  solid  land 
almost  anywhere  and  most  of  it  can  be  had  free  of  charge.  It  is 
necessary  also  to  have  room,  but  we  can  get  plenty  of  room  with- 
out having  to  pay  for  it.  Fertility,  however,  is  limited,  and  the 
most  fertile  lands  are  very  scarce.  Therefore,  if  we  want  land  of 
the  most  fertile  kind  we  are  likely  to  find  that  a  good  many  others 
want  it  also  and  that  we  shall  have  to  bid  against  them  if  we  are 
to  get  it.  Some  land  is  better  located  than  the  rest,  and  land  in 
the  best  location  is  so  scarce  that  we  have  to  outbid  a  good  many 
others  if  we  are  to  get  it. 

Since  there  are  so  many  grades  of  land,  from  the  standpoint 
of  fertility  and  of  location,  it  follows  that  land  has  no  uniform 
value,  but  each  piece  has  a  value  of  its  own,  depending  upon  these 
two  qualities.  There  is  plenty  of  land  so  poor  in  these  two  qual- 
ities that  you  can  get  it  for  little  or  nothing.  Some  is  so  desir- 
able, with  respect  to  one  or  both  of  these  qualities,  as  to  give  it 
an  almost  fabulous  value.  The  differences  in  the  value  of  lands 
within  a  city  are  due  almost  wholly  to  differences  in  location.  In 
agricultural  communities  location  is  a  factor,  but  not  the  only  nor 
the  most  important  factor,  in  determining  land  values.  Nearness 
to  market  or  to  railroads,  the  character  of  the  wagon  roads,  acces- 
sibility to  schools  and  other  social  advantages,  count  for  much ; 
but  the  character  of  the  soil  and  the  subsoil,  the  climate,  the 
moisture,  and  the  other  factors  which  determine  plant  growth 
count  far  more.  All  these  factors  which  promote  plant  growth  may 


112  ELEMENTARY  ECONOMICS 

be  grouped  under  the  name  "  fertility."  In  that  case  we  may  say 
that,  from  an  economic  point  of  view,  location  and  fertility  are 
the  most  important  properties  of  agricultural  land. 

Good  location  saves  transportation.  When  we  look  for  the 
reason  why  location  is  a  matter  of  such  importance,  we  must  recall 
the  fact  that  man's  chief  work,  on  the  physical  side,  is  the  moving 
of  materials.  It  is  this  which  requires  power  ;  and  power  is  costly, 
whether  it  be  generated  in  the  human  body  and  exercised  through 
the  muscles,  or  whether  it  be  developed  in  the  bodies  of  animals 
or  through  mechanical  agents.  One  very  important  phase  of  the 
work  of  moving  materials  is  that  of  marketing  products.  The 
nearer  a  body  of  land  is  to  a  market,  and  the  better  the  means  of 
transportation,  the  less  labor  and  power  it  takes  to  get  its  prod- 
ucts to  market.  On  land  which  is  well  located  with  respect  to 
markets  it  is  therefore  possible  to  utilize  labor  more  efficiently 
than  on  land  which  is  badly  located. 

It  is  also  costly  to  move  man  himself.  It  is  therefore  advan- 
tageous that  he  should  live  in  close  proximity  to  his  work.  If  he 
lives  far  away,  the  cost  of  transportation  is  greater,  and  the  labor 
force  of  the  community  is  less  efficiently  applied,  than  if  he  lives 
close  by.  Even  though  the  trolley  fare  is  the  same  for  a  long  as 
for  a  short  distance,  transportation  costs  the  community  more  over 
the  long  distance.  In  the  first  place,  it  takes  a  longer  time  and 
the  passenger  loses  that  time.  In  the  second  place,  it  costs  the 
transportation  company  more,  and  that  extra  cost  must  ultimately 
reduce  the  total  productive  power  of  the  community. 

Access  to  food  supplies.  It  seems  to  be  a  general  rule,  apply- 
ing to  all  forms  of  life,  that  numbers  depend  upon  food  supply. 
Where  food  is  abundant,  numbers  may  be  large.  Since  food  comes 
ultimately  from  the  soil,  the  capacity  of  the  soil  to  produce 
food  places  a  limit  upon  numbers.  One  of  two  things  must,  of 
course,  follow :  a  large  population  must  either  spread  over  wide 
areas  of  land  in  order  to  find  sufficient  food  or  it  must  transport 
food  from  these  wide  areas  where  it  is  produced  to  the  densely 
populated  centers  where  the  people  live.  If  we  were  not  able  to 
transport  food  and  other  supplies  such  long  distances,  our  large 


THE  ECONOMICAL  USE  OF  LABOR  ON  LAND     113 

cities  would  be  compelled  to  scatter  and  build  many  smaller  cities, 
or  else  live  as  scattered  families,  in  order  to  be  nearer  the  sources  of 
supply.  Even  with  our  present  means  of  transportation  there  are 
limits  beyond  which  it  does  not  seem  advantageous  to  concentrate 
our  population. 

Increasing  floor  space  by  erecting  tall  buildings.  The  neces- 
sity for  room  for  the  indoor  industries  can  be  supplied  in  part  by 
tall  buildings.  Floor  space  can  be  increased  by  as  many  stories 
as  can  be  built,  subtracting,  of  course,  the  space  necessary  for 
elevators,  stairways,  airshafts,  etc.  But  after  a  very  moderate 
height  is  reached,  the  cost  of  construction  increases  more  than  in 
proportion  to  the  added  floor  space.  To  add  one  more  story  on 
the  top  of  a  tall  building  requires  stronger  walls  all  the  way  down 
and  also  a  better  foundation.  Besides,  it  costs  more  to  carry  the 
building  materials  to  the  greater  height ;  the  cost  of  elevator  serv- 
ice to  the  top  floor  is  somewhat  higher  than  for  lower  floors. 
A  twenty-story  building  is  of  a  very  moderate  height  in  some  of  our 
large  cities  where  land  is  very  scarce ;  but  even  this  height  would 
be  absolutely  unprofitable  in  a  town  where  there  was  plenty  of 
room  on  the  ground. 

Streets.  The  traffic  needs  of  a  busy  population  also  make  de- 
mands upon  land  for  streets.  IMuch  the  same  methods  are  used  to 
economize  land  for  street  purposes  as  for  building  purposes.  The 
building  of  subways,  sub-subways,  elevated  roads,  and  viaducts  is 
a  familiar  method.  It  used  to  be  suggested  in  a  jocular  way  that 
a  road  through  the  air  would  also  economize  land.  Flying  ma- 
chines may  eventually  transform  that  joke  into  a  real  economy. 
Superior  pavements  for  the  support  of  larger  and  more  powerful 
vehicles  will  also  economize  road  space  somewhat  by  permitting 
more  traffic  to  be  carried  on  over  a  street  of  given  width. 

Economizing  agricultural  land.  These  methods  of  economiz- 
ing land  are  suited  to  urban  rather  than  to  rural  districts.  Space 
is  required  in  agriculture,  as  suggested  above,  for  the  utilization  of 
solar  energy,  soil,  and  moisture  in  plant  growth.  "Two-story 
farming,"  as  Professor  J.  Russell  Smith  calls  it,  consists  in  grow- 
ing tree  crops  with  ground  crops  underneath.    Some  space  can  be 


114  ELEMENTARY  ECONOMICS 

saved  in  these  ways,  provided  there  is  plenty  of  sunlight,  soil, 
moisture,  and  other  elements  of  plant  growth. 

Intensive  farming.  ** Two-story  farming"  is  only  one  phase 
of  intensive  agriculture,  which  may  be  defined  as  the  use  of  large 
quantities  of  labor  and  capital  in  the  cultivation  of  relatively 
small  areas  of  land  in  order  to  get  large  crops  per  unit  of  land ; 
that  is,  large  crops  per  acre.  As  will  be  shown  in  Chapter  XIV, 
extreme  efforts  to  increase  the  productivity  of  land  tend  to  de- 
crease the  productivity  of  labor ;  that  is,  to  reduce  the  product 
per  unit  of  labor.  When  a  country  becomes  thickly  populated, 
however,  if  its  people  are  unwilling  to  migrate  to  countries  where 
land  is  abundant,  the  problem  of  economizing  land  becomes  one  of 
great  importance.  So  long  as  the  people  can  find  outside  markets 
for  the  products  of  indoor  industries,  they  may  sell  these  products 
to  foreign  peoples  and  buy  the  products  of  the  soil  from  less 
densely  populated  countries,  ^^^len  these  outside  markets  cease 
to  expand,  and  the  population  is  therefore  compelled  to  live  more 
and  more  from  the  products  of  its  own  soil,  it  must  perforce  get 
more  and  more  out  of  its  soil.  Intensive  agriculture  is  then  forced 
upon  it.  Yet,  as  a  matter  of  observed  fact,  highly  intensive  agri- 
culture the  world  over  is  associated  with  the  poverty  of  those  who 
actually  work  on  the  soil. 

Turning  to  heavy-yielding  crops.  If  people  would  change 
their  habits  of  consumption  and  consume  products  which  could  be 
economically  produced  under  intensive  methods  or  products  which 
are  capable  of  yielding  large  quantities  of  food  per  acre  such  as 
potatoes,  parsnips,  and  beans,  instead  of  wheat  and  beef,  a  great 
deal  of  land  could  be  saved ;  in  other  words,  a  much  larger  popu- 
lation could  be  supported  from  a  given  area. 

Turning  to  the  indoor  industries.  It  is  not  likely  to  be  re- 
peated too  often  that  the  favorite  method  of  economizing  land 
and  supporting  a  large  population  is  to  give  up  trying  to  be 
physically  self-supporting  and  to  become  commercially  self- 
supporting.  By  being  physically  self-supporting  is  meant  pro- 
ducing from  our  own  soil  all  or  practically  all  that  we  need.  By 
becoming  commercially  self-supporting  is  meant  bringing  in  the 


THE  ECONOMICAL  USE  OF  LABOR  ON  LAND     115 

products  of  the  soil  from  other  countries,  selling  to  those  countries 
in  return  the  products  of  the  mines  and  the  indoor  industries. 
The  products  of  the  indoor  industries  may  themselves  be  made 
from  imported  raw  materials.  In  this  case  we  bring  in  raw  mate- 
rials, work  them  up  into  finished  products,  and  sell  them  again 
to  outside  people,  living  ourselves  upon  the  profits  of  the  transac- 
tion.   We  virtually  sell  our  labor  to  other  nations. 

Indoor  industries  limited  by  market.  This  method  of  building 
up  a  great  population  has  such  vast  possibilities,  provided  we  are 
so  situated  as  to  be  able  to  do  it,  as  to  appeal  powerfully  to  the 
imaginations  of  statesmen  and  nation  builders.  But  if  outside 
markets  fail,  then  we  must  turn  to  the  development  of  our  own 
soil,  for  in  that  case  we  must  become  physically  self-supporting. 

The  pent-up  versus  the  expanding  type  of  civilization.  Even 
though  we  aim  to  become  physically  self-supporting,  we  have  two 
distinct  lines  of  development  open  to  us :  one  is  to  develop  an 
oriental,  or  pent-up,  type  of  civilization ;  the  other  is  to  develop 
an  occidental,  or  expanding,  type  of  civilization.  By  an  oriental, 
or  pent-up,  type  of  civilization  is  meant  a  civilization  in  which 
we  try  to  live  on  our  existing  area  of  land  and  to  support  a  grow- 
ing population  without  adding  to  our  productive  area,  as  is  done 
in  China  and  India.  This  leads  to  a  gradually  increasing  intensity 
of  cultivation  and  a  gradual  lowering  of  the  standard  of  living  of 
those  who  work  on  the  soil,  and  eventually  of  the  masses  of  the 
people.  By  an  occidental,  or  expanding,  type  of  civilization  is 
meant  a  civilization  in  which  the  effort  is  made  to  maintain  a 
high  standard  of  living  and  a  large  product  per  man  by  widening 
our  cultivated  area  as  the  population  grows  rather  than  by  culti- 
vating the  original  area  more  and  more  intensively.  When  our 
ancestors  came  to  this  continent  and  later  spread  over  it,  they 
were  developing  an  expanding  type  of  civilization. 

Our  people  have  preferred  to  expand  over  more  land  rather  than 
to  try  to  live  on  the  original  area,  whatever  that  original  area  may 
have  been.  It  is  difficult  to  see  where  this  tendency  will  lead  us, 
but  it  is  a  rather  striking  fact  that,  from  the  Greeks  down  to  the 
nations  of  the  present,  every  great  European  nation  has  been  a 


ii6  ELEMENTARY  ECONOMICS 

colonizing  nation.  Thus  people  have  preferred  to  go  where  land 
was  abundant,  rather  than  to  stay  where  population  was  dense. 
Unless  we  change  our  habits  very  decidedly,  we  shall  probably 
continue  to  do  the  same  in  the  future ;  that  is,  we  shall  try  to 
maintain  our  standard  of  living.  When  this  cannot  be  achieved  by 
intensive  cultivation,  we  shall  swarm,  or  send  out  colonists ;  that 
is,  some  people  will  emigrate.  The  only  alternative  would  be  the 
maintenance  of  a  stationary  population  through  birth  control. 

EXERCISES 

1.  What  are  the  two  factors  which  give  value  to  land? 

2.  Why  is  location  so  important? 

3.  What  are  some  of  the  means  of  economizing  space  (i)  in  cities? 
(2)  in  the  country? 

4.  What  is  meant  by  intensive   farming? 

5.  Is  it  a  means  of  economizing  labor  or  of  economizing  land? 

6.  What  fixes  the  limit  to  the  development  of  indoor  industries  in  a 
country  ? 

7.  What  is  the  difference  between  a  pent-up  and  an  expanding  type 
of  civilization? 

8.  Which  is  preferable  for  the  United  States? 


CHAPTER  XIV 

KEEPING  A  PROPER  BALANCE  AMONG  THE 
FACTORS  OF  PRODUCTION 

Combinations  must  be  balanced.  In  the  production  of  almost 
any  article  it  is  necessary  to  make  use  of  a  great  many  things, 
different  kinds  of  material,  different  kinds  of  tools  or  machines, 
and  different  kinds  of  labor.  All  these  elements  that  enter  into  its 
production  must  be  combined  in  certain  proportions  in  order  to  get 
the  most  satisfactory  results.  This  is  true  not  only  of  producing 
a  chemical  product  and  of  cooking  a  dish ;  it  is  equally  true  of 
growing  corn,  feeding  cattle,  manufacturing  cloth,  or  producing 
anything  else. 

If  things  are  thrown  out  of  balance  some  unsatisfactory  result 
is  certain  to  follow,  even  if  the  product  itself  is  not  spoiled.  This 
unsatisfactory  result  may  show  itself  on  the  market  in  unsatis- 
factory prices,  even  if  the  producer  refuses  to  spoil  the  product  by 
a  bad  mixture.  He  may  refuse  to  buy  all  of  one  ingredient  that 
happens  to  be  too  abundant  to  balance  the  limited  quantity  of 
another  ingredient.  If,  for  example,  sugar  is  scarce  and  cran- 
berries abundant,  cooks  and  housekeepers  may  refuse  to  buy  more 
cranberries  than  can  be  sweetened  with  the  limited  supply  of 
sugar.    Cranberries  will  then  be  hard  to  sell. 

Balanced  ingredients.  In  the  manufacture  of  old-fashioned 
gunpowder,  to  take  another  example,  charcoal,  saltpeter,  and  sul- 
phur were  required,  and  they  had  to  be  combined  in  fairly  definite 
proportions.  If  it  happened  that  there  was  more  charcoal  on  the 
market  than  would  combine  with  the  limited  supply  of  one  of  the 
other  ingredients,  say  saltpeter,  the  production  of  gunpowder  was 
limited  by  the  small  supply  of  saltpeter  and  not  by  the  supply  of 
charcoal. 

117 


ii8  ELEMENTARY  ECONOMICS 

Balanced  agents  of  production.  This  principle  applies  not 
only  to  raw  materials  which  are  used  in  various  lines  of  production 
but  to  the  active  agents  themselves,  such  as  labor.  However 
numerous  the  hodcarriers  might  be,  if  there  were  a  great  scarcity 
of  brick  and  stone  masons,  not  many  hodcarriers  could  be  used. 
At  bottom  this  is  much  the  same  problem  as  that  of  balancing 
rations  or  fertilizers. 

A  balanced  nation.  This  principle  of  balancing  up  the  factors 
of  production  is  just  as  important  for  the  nation  as  a  whole  as  it 
is  for  the  individual  farmer  or  manufacturer.  The  country  which 
possesses  a  surplus  of  land  and  a  scarcity  of  labor  will  find  that 
its  land  is  very  ineffectively  used.  WTiat  it  needs  is  more  labor. 
It  cannot  very  well  sell  its  land,  but  it  will  in  all  probability  pursue 
a  policy  which  will  increase  its  labor  supply.  Labor  under  such 
conditions  will  be  in  great  demand,  and  for  the  same  reason  that 
in  dietetics  protein  will  be  in  great  demand  if  it  is  scarce  while 
the  other  food  elements  are  abundant.  In  such  a  community  land 
is  certain  to  be  cheap  and  labor  dear.  The  high  price  of  labor, 
the  ease  with  which  men  can  establish  themselves  on  the  land  as 
independent  farmers,  or  get  remunerative  work,  encourages  im- 
migration on  the  one  hand,  and,  on  the  other  hand,  early  marriages 
and  large  families  among  the  native  born.  This  is  especially  true 
on  the  fanns,  where  labor  is  scarce  and  land  abundant.  Every 
additional  child  is  money  in  the  farmer's  pocket,  because  as  soon 
as  the  child  is  old  enough  to  work  he  helps  to  solve  the  ever- 
present  problem  of  scarcity  of  labor.  Thus,  from  two  sources  the 
labor  supply  is  increased  in  response  to  the  effort  to  balance  the 
factors  of  production. 

But  tools  and  equipment  of  all  kinds,  which  are  generally  in- 
cluded under  the  word  ''capital,"  are  almost,  though  not  quite, 
as  essential  as  either  labor  or  land.  If  capital  is  scarce  while  the 
other  factors  are  abundant,  it  will  be  in  great  demand,  for  the 
same  reason  that  labor  is  in  great  demand  where  it  is  scarce  and 
land  abundant. 

An  overpopulated  country,  on  the  other  hand,  finds  itself  with 
a  badly  balanced  industrial  system,  but  the  balance  is  in  this  case 


KEEPING  A  PROPER  BALANCE  119 

disturbed  in  the  opposite  direction.  Land  being  the  scarce  factor, 
every  acre  that  can  possibly  be  used  is  of  the  utmost  importance. 
Labor,  on  the  other  hand,  is  cheap.  It  can  easily  be  spared.  If 
it  sees  fit  to  emigrate  to  other  countries,  no  great  effort  is  made 
to  prevent  it  and  no  high  price  is  offered  it  as  a  reward  for  staying 
at  home.  Under  such  circumstances,  to  hold  an  acre  of  land  out 
of  use  would  seriously  reduce  the  total  production  of  the  com- 
munity, whereas  to  lose  a  laborer  by  emigration  is  no  great  loss. 

The  fundamental  problem  of  scientific  management.  The 
fundamental  problem  of  all  management,  whether  it  be  the  man- 
agement of  a  diet  kitchen,  a  farmer's  feeding  lot,  a  farm  as  a 
whole,  a  factory,  a  railroad,  or  a  nation,  is  the  problem  of  balanc- 
ing the  factors  of  production. 

A  balanced  population.  The  greatest  danger  of  all,  however, 
and  the  one  which,  apparently,  is  least  appreciated  by  some  of  our 
statesmen,  is  that  of  producing  a  badly  balanced  population.  At 
the  beginning  of  this  chapter  the  question  of  the  balancing  of  the 
hodcarriers  and  the  brick  and  stone  masons  was  mentioned.  This 
may  be  taken  as  typical  of  the  necessity  of  balancing  skilled  labor 
and  unskilled  labor.  To  have  more  unskilled  labor  than  can  be 
used  effectively  wnth  the  limited  supply  of  skilled  labor  is  quite  as 
bad  as  to  have  more  people  than  can  be  supported  on  the  land, 
or  fewer  people  than  are  necessary  to  utilize  the  land.  To  have 
more  manual  labor  than  will  combine  effectively  with  mental 
labor,  to  have  more  mental  laborers  who  are  capable  of  doing 
only  routine  work  than  will  combine  effectively  with  those  mental 
laborers  who  possess  originality,  inventiveness,  and  the  power  of 
leadership,  is  also  to  produce  a  bad  balance. 

Probably  the  most  important  of  all  problems  of  statesmanship, 
and  at  the  same  time  one  of  the  most  difficult,  is  that  of  balancing 
the  population  so  that  no  particular  class  of  labor  is  either  over- 
supplied  or  undersupplied  with  respect  to  any  other  class.  One 
method  of  preserving  the  balance  is  by  education  and  vocational 
guidance.  Training  men  for  the  occupations  where  men  are 
needed,  as  evidenced  by  the  high  wages  and  salaries  paid,  is  one 
of  the  quickest  and  most  effective  ways  of  preserving  the  balance. 


120  ELEMENTARY  ECONOMICS 

Whenever  any  occupation  is  so  undermanned  as  to  make  it  difficult 
to  find  workers,  wages  or  salaries  will  tend  to  rise.  This  increase  in 
remuneration  is  then  a  standing  invitation  to  young  men  to  pre- 
pare themselves  for  that  work,  and  a  properly  conducted  educa- 
tional system  is  a  standing  opportunity  to  young  people  to  accept 
the  invitation. 

Differential  birth  rates.  A  wholesome  moral  life  would  also 
be  a  powerful  agency  working  in  the  same  direction.  Those  who 
have  demonstrated  that  they  are  needed  by  the  fact  that  they  can 
fill  good  positions  for  which  there  is  a  demand,  where  incomes  are 
consequently  large,  are  the  ones  who  ought  to  reproduce  their 
kind  most  abundantly.  Unfortunately,  in  most  modern  com- 
munities, they  are  the  very  people  who  multiply  least  rapidly. 

Geographical  redistribution  of  population.  That  it  is  better 
for  a  growing  population  to  have  more  land  than  to  remain 
cooped  up  in  its  original  home  is  the  idea  on  which  a  great 
deal  of  the  history  of  the  world  has  been  made.  The  migra- 
tions of  peoples  in  search  of  more  land  is  one  of  the  large  aspects 
of  human  history.  There  could  be  no  possible  object  in  seek- 
ing more  land,  instead  of  remaining  content  with  the  land  in 
the  possession  of  the  people,  were  it  not  for  the  fact  of  diminish- 
ing returns.  Therefore  a  very  discriminating  writer^  has  stated 
the  opinion  that  the  law  of  decreasing  returns  is  the  funda- 
mental fact  of  human  history.  The  effort  of  a  growing  population 
to  acquire  more  land  is,  from  the  standpoint  of  the  present  chapter, 
merely  an  effort  to  restore  the  balance  between  factors  of  pro- 
duction. In  any  given  state  of  civilization  too  dense  a  population — 
that  is,  too  much  labor  and  too  little  land — works  to  the  disad- 
vantage of  the  people.  When  they  begin  to  perceive  that  they 
would  be  better  off  if  they  had  more  land,  nothing  except  a  strong 
military  guard  or  a  Chinese  wall  will  prevent  emigration. 

Migration  of  capital.  But  capital  follows  the  same  law.  In  a 
community  where  the  land  and  labor  are  not  properly  balanced 
with  an  adequate  supply  of  capital,   the  perception  of  a  need 

^  Edward  Van  Dyke  Robinson,  "War  and  Economics,"  Political  Science 
Quarterly,  Vol.  XV,  pp.  581-622. 


KEEPING  A  PROPER  BALANCE  121 

for  more  capital  —  that  is,  tools  and  equipment — is  likely  to  be 
pretty  clear  and  definite.  This  leads  to  the  offer  of  high  rates  of 
interest  as  an  inducement  to  capital  to  come.  The  fortunate  in- 
dividual who  can  gain  possession  of  an  additional  fund  of  capital, 
being  able  to  increase  his  product  considerably,  finds  it  economical 
to  pay  a  high  rate  of  interest  for  it  rather  than  not  to  get  it.  If 
he  owns  his  own  capital,  whereas  his  competitors  in  production 
lack  capital,  he  will  have  a  great  advantage  over  them  and  will 
therefore  secure  a  large  income.  According  to  our  analysis  in  the 
chapter  on  The  Source  of  Interest,  this  additional  income  which  he 
gets  from  the  use  of  his  own  capital  is  interest  as  truly  as  the  in- 
come which  he  gets  from  lending  his  capital  to  someone  else. 

EXERCISES 

1.  Are  there  many  things  that  can  be  produced  without  a  combina- 
tion of  factors? 

2.  Does  it  make  any  difference  in  what  ratios  the  factors  are 
combined  ? 

3.  In  case  the  factors  are  not  to  be  found  in  the  right  proportions, 
which  factors  are  likely  to  be  more  desired,  those  which  are  scarce 
or  those  that  are  abundant? 

4.  Which  would  add  more  to  production,  to  add  to  the  quantity 
of  the  scarce  factor  or  to  add  to  the  quantity  of  the  abundant  factor  ? 

5.  What  is  meant  by  a  balanced  nation? 

6.  What  is  the  fundamental  problem  of  scientific  management? 

7.  What  is  meant  by  a  balanced  population? 

8.  What  are  some  causes  that  tend  to  throw  the  population  out  of 
balance  ? 

9.  What  could  be  done  to  restore  the  balance? 


PART  THREE.    THE  PRODUCTIVE 
ACTIVITIES 


CHAPTER  XV 
WAYS  OF  GETTING  A  LIVING 

In  Part  One  we  considered  the  underlying  conditions  of 
national  prosperity.  We  found  the  most  important  of  these  condi- 
tions to  be  a  good  geographical  situation  and  a  vigorous,  intelli- 
gent, and  progressive  people.  Of  these  two  we  found  the  latter 
to  be  of  vastly  the  greater  importance.  Much  depends  upon  the 
quality  of  the  people  and  much  upon  their  ways  of  doing  things. 
In  Part  Two  we  considered  the  principal  means  by  which  the  labor 
power  of  the  people  may  be  economized,  to  the  end  that  produc- 
tion may  be  increased  without  putting  an  increased  burden  of 
physical  labor  upon  the  people.  In  Part  Three  we  are  to  con- 
sider the  principal  activities  in  which  men  engage  in  prosperous 
countries,  these  being  the  activities  that  make  the  countries  pros- 
perous. 3Ien  engage  in  these  activities,  in  the  main,  for  the  pur- 
pose of  getting  a  living ;  but  while  this  is  usually  their  purpose, 
the  result  of  pursuing  these  activities  is  that  individuals  make  the 
nation  prosperous  while  tr\'ing  to  become  prosperous  themselves. 

Individual  and  national  prosperity.  It  must  be  understood, 
however,  to  begin  with  that  some  individuals  may  sometimes,  if 
the  laws  permit,  gain  at  the  expense  of  the  nation,  whereas  most 
of  the  others  gain  by  adding  to  the  prosperity  of  the  nation. 
Some  may,  if  they  are  permitted  to  do  so,  gain  wealth  at  the  ex- 
pense of  the  rest  of  the  people,  while  others  gain  wealth  by  con- 
tributing useful  service  and  producing  useful  things  for  the  rest  of 
the  people  and  receiving  good  pay  for  their  services  and  their 
products.  It  is  of  the  utmost  importance  that  we  understand  what 
activities  enrich  the  nation  as  well  as  the  individuals  who  carry 
them  on  and  what  activities  may  enrich  the  individual  at  the 
expense  of  the  nation. 

I2S 


126 


ELEMENTARY  ECONOMICS 


Ways  of 

acquiring' 

Wealth 


'War 
Piracy 
Plundering 
Robbing 
Harmful-!  Swindling 

Counterfeiting 
Adulterating  goods 
'  UneconomicaU  Monopolizing 

.Terrorizing 
Marrying  wealth 
Inheriting  wealth 
Benefiting  through  a  rise  in  land 
values 

'  Hunting 
Fishing 
'  Extractive  -l  Grazing 

Lumbering 
Mining 

Tillage 


Neutral . 


'  Primary  in- 
dustries 


.  Economical 


'Agriculture- 


.  Genetic  - 


Plant 

breeding 
Animal 

breeding 


Secondary  industries 


Forestry 

Fish  culture 

'  Manufacturing 

Transporting 

Storing 

_^  Merchandising 

'  Healing 


.  Personal  and  professional  services  - 


Teaching 
Inspiring 
Governing 
Amusing,  etc. 

Economical  and  uneconomical  ways.  The  diagram  above 
should  be  studied  very  carefully.  In  this  diagram  the  ways  of 
acquiring  wealth  are  divided  into  two  main  classes — the  un- 
economical and  the  economical.  From  the  social  or  national 
point  of  view  it  is  uneconomical  to  have  men  acquiring  wealth 


WAYS  OF  GETTING  A  LIVING  127 

by  methods  which  do  not  add  to  the  total  wealth  or  well-being 
of  the  society  or  the  nation.  When  one  man  gains  something  by 
plundering,  swindling,  counterfeiting,  or  monopolizing,  someone 
else  loses  a  like  amount,  and  nothing  is  added  to  the  total.  In 
fact,  if  these  harmful  methods  become  general,  it  is  likely  to  dis- 
courage honest  industry  and  actually  diminish  the  total  production 
of  wealth.  Even  the  neutral  methods  may  become  harmful  if  they 
result  in  wasted  lives  ;  that  is,  if  they  enable  men  and  women  who 
would  otherwise  be  productive  and  useful  to  live  in  idleness  and 
luxury.  The  smaller  the  proportion  of  the  people  who  live  by 
means  of  the  uneconomical  methods,  the  more  prosperous  the 
nation  is  likely  to  become. 

By  the  economical  ways  of  acquiring  wealth  are  meant  all  those 
ways  by  which  an  individual  contributes  to  the  wealth  of  the  whole 
community  as  much  as  he  gains  for  himself.  He  may  make  his 
contribution  by  laboring  either  to  produce  commodities  or  to 
render  direct  service  to  some  of  his  fellow  men.  In  either  case, 
where  he  gives  honest  service  for  honest  pay  he  is  enriching  some- 
one else  in  proportion  as  he  himself  is  enriched.  A  nation  in  which 
this  rule  prevails  universally,  where  everyone  is  contributing  to 
the  well-being  of  someone  else  in  exact  proportion  as  he  himself 
prospers,  has  at  least  one  of  the  conditions  of  general  prosperity. 
If  each  one  is  capable  and  well  trained,  so  that  he  can  give  efficient 
service, —  that  is,  if  he  contributes  largely  to  the  prosperity  and 
well-being  of  someone  else, — then  everyone  is  prosperous,  which 
is  the  same  as  saying  that  the  nation  as  a  whole  is  prosperous. 

Economical  ways  of  getting  wealth.  The  economical  ways  of 
getting  a  living  are  subdivided  into  three  classes  :  first,  the  primary 
industries ;  second,  the  secondary  industries ;  and,  third,  profes- 
sional and  personal  service.  The  primary  industries  are  those 
which  produce  commodities  directly  from  their  original  and  natural 
sources, — which  take  material  as  nature  provides  it  and  appro- 
priate it  to  some  human  use  or  change  it  from  a  form  which  is  not 
usable  to  a  form  which  is  either  usable  or  one  stage  nearer  to 
usableness.  For  example,  the  elements  which  produce  plant 
growth  are  not,  in  their  natural  state,  available  for  human  use. 


128  ELEMENTARY  ECONOMICS 

The  farming  industry  converts  these  elements  into  something 
which  is  either  usable,  as  in  the  case  of  fruits  and  vegetables,  or 
at  least  one  stage  on  its  way  toward  it,  as  in  the  case  of  grain  or 
live  stock.  The  secondary  industries  are  those  which  take  the 
products  of  the  primary  industries  which  are  in  need  of  further 
modification  and  carry  them  through  the  remaining  stages  on  their 
way  to  final  usefulness.  The  farmer's  grain,  besides  being  trans- 
ported long  distances  from  places  where  there  is  a  surplus  to  other 
places  where  there  is  a  shortage,  must  also  be  stored  from  thresh- 
ing time  until  it  is  needed  by  the  consumers,  and  it  must  be  ground 
into  flour  and  baked  into  bread  or  manufactured  into  some  other 
form  of  food  before  it  is  ready  for  use. 

Personal  and  professional  services  include  all  lines  of  work  which 
do  not  directly  produce  salable  commodities.  Lawyers,  doctors, 
preachers,  teachers,  actors,  barbers,  policemen,  and  even  public 
officials,  besides  multitudes  of  others,  are  performing  professional 
and  personal  services. 

Necessity  of  repressing  uneconomical  ways.  It  is  apparent 
that  if  all  uneconomical  ways  of  getting  a  living  could  be  repressed, 
at  least  all  the  harmful  ones,  it  would  be  a  good  thing  to  repress 
them.  Then  everyone  would  be  compelled  to  get  his  living,  if  at 
all,  by  doing  things  that  would  enrich  the  rest  of  the  people  as 
well  as  himself.  The  nation  would  then  prosper  more  than  it 
possibly  could  if  a  considerable  part  of  the  people  wasted  their 
working  power  in  doing  harmful  or  useless  things  rather  than 
useful  or  productive  things. 

Difficulty  of  repression.  The  coarser  forms  of  crime  and  fraud 
are  pretty  effectually  repressed  now  in  all  civilized  countries,  but 
there  are  some  more  refined  forms  that  are  difficult  to  repress  by 
law.  False  advertising,  overzealous  salesmanship,  political  cam- 
paigning that  verges  on  demagogy,  public  discussion  in  which 
illogical  and  unsound  arguments  are  used,  are  very  difficult  to 
control  by  law.  Even  to  attempt  to  control  them  opens  the  govern- 
ment to  the  charge  of  interfering  with  the  freedom  of  speech  or 
the  liberty  of  the  press.  The  result  is  that  it  is  still  possible  to 
gain  trade  or  political  office  by  mild  and  subtle  forms  of  deception, 


WAYS  OF  GETTING  A  LIVING  129 

if  one  is  unscrupulous  enough  to  use  these  methods  and  skillful 
enough  to  use  them  effectually. 

Not  skill  but  service.  There  is  a  certain  popular  belief,  fortu- 
nately growing  less  popular,  that  skill  is  entitled  to  a  reward.  If 
that  were  true  the  skillful  swindler  would  be  entitled  to  the  re- 
sults of  his  skill.  Not  skill  but  service  should  be  the  basis  of 
reward.  In  other  words,  when  skill  is  used  serviceably,  it  is  en- 
titled to  a  reward,  otherwise  not. 

The  way  of  usefulness  versus  the  way  of  violence.  Even  vio- 
lence and  terrorism  are  still  used  to  a  certain  extent.  There  are 
still,  in  fact,  two  widely  different  methods  of  getting  what  you 
want.  One  is  to  make  yourself  so  useful  that  others  are  glad  to 
pay  you,  or  to  give  you  what  you  want,  in  return  for  your  service 
or  your  product ;  the  other  is  to  make  yourself  so  dangerous  that 
others  will  be  afraid  to  refuse  you  what  you  demand.  The  one 
pursues  the  method  of  voluntary  agreement  among  free  citizens ; 
the  other  pursues  the  method  of  force.  The  one  appeals  to  good 
will ;  the  other  to  fear.  The  one  is  constructive ;  the  other  is 
destructive.  The  one  is  the  method  of  civilized  men, —  that  is, 
of  men  who  have  learned  the  art  of  living  and  working  peaceably 
together  in  large  numbers ;  the  other  is  the  method  of  savages — 
that  is,  of  men  who  have  not  learned  how  to  get  along  peaceably 
together. 

Real  distinction  between  civilized  and  savage  men.  This  is 
really  the  broadest  distinction  between  the  civilized  man  and  the 
savage.  The  civilized  man  has  many  vices  as  well  as  many  virtues, 
and  the  savage  likewise.  Some  vices  the  civilized  man  possesses  in 
greater  degree  than  the  savage  man.  But  the  savage  has  one  fatal 
weakness  that  will  always,  until  he  loses  it,  hold  him  down  and 
prevent  his  tribe  from  rising  to  prosperity  and  power.  He  is  prone 
to  use  force  at  times  and  not  to  rely  wholly  upon  persuasion, — 
to  get  what  he  wants  by  making  himself  so  dangerous  that  other 
people  will  be  afraid  to  refuse  his  demands.  With  all  his  vices 
the  civilized  man  has  one  supreme  virtue  that  will  always,  so  long 
as  he  keeps  it,  keep  him  ahead  of  the  savage.  He  relies  primarily 
upon  persuasion  and  good  will  as  means  of  getting  what  he  wants. 


130  ELEMENTARY  ECONOMICS 

He  tries  to  get  what  he  wants  by  making  himself  so  useful  that 
others  will  be  glad  to  pay  him  for  his  product  or  his  service.  This 
is  the  only  way  in  which  men  can  live  together  in  large  numbers 
without  fighting  among  themselves.  They  who  can  live  and  work 
together  peaceably  in  large  numbers  will  always  prosper  more  than 
those  who  cannot. 

Why  civilized  men  are  more  prosperous  than  savages.  There 
are  fundamental  reasons  why  those  people  who  can  live  and  work 
together  in  large  numbers  without  fighting  among  themselves  will 
always  prosper  more  than  those  people  who  cannot.  All  the  energy 
of  those  who  have  learned  this  art  can  be  used  in  production  and 
service.  That  makes  prosperity.  Those  who  have  not  learned  it 
waste  a  great  deal  of  their  energy  in  destructive  fighting,  and,  in 
addition  to  wasting  their  productive  energy,  they  destroy  much 
that  is  already  produced  and  discourage  others  from  trying  to 
produce. 

No  nation  is  wholly  civilized  or  wholly  savage.  In  other  words, 
a  civilized  nation  is  not  one  in  which  all  are  civilized  and  none 
savage ;  it  is  rather  one  in  which  the  balance  of  power  is  held 
by  the  men  of  peace  and  the  men  of  violence  are  held  in  check. 
A  savage  nation  is  not  one  in  which  all  are  savage  and  none 
civilized  ;  it  is  rather  one  in  which  the  men  of  violence  hold  the 
balance  of  power  and  the  men  of  peace  have  no  chance. 

The  duty  of  being  civilized.  In  view  of  what  has  been  said 
in  this  chapter,  anyone  \yho  really  cares  to  see  his  country  grow 
prosperous  and  great  must  study  the  differences  between  the 
economical  and  the  uneconomical  ways  of  getting  a  living.  He 
must  then  be  careful,  first,  to  select  an  economical  rather  than 
an  uneconomical  way  of  making  his  living,  and,  second,  he  must 
throw  the  weight  of  his  influence  against  all  uneconomical  ways. 
These  must  be  discouraged,  particularly  the  harmful  ways,  by  law 
and  by  public  sentiment,  while  all  economical  ways  must  be  en- 
couraged in  every  possible  way,  by  favorable  laws,  by  public  senti- 
ment and  social  esteem,  and  by  private  example. 


WAYS  OF  GETTING  A  LIVING        J i^^S^y^     '^ 

EXERCISES  v-1  ^  .  ^"^^^^ 

1.  What  is  the  difference  between  an  uneconomical  and  an  economi- 
cal way  of  getting  a  living  ?  Name  some  occupations  that  come  under 
each  of  these  two  classes.      ','/>'  ,■      -^-K  ■-,  .,  i 

2.  How  would  you  classify  the  economical  way^  of  gettij 

3.  What  are  the  primary  industries?        ,.  .,  , 

4.  What  are  the  secondar>'  industries  ?  '-^-^^ttJJ^   "^ l^^^^^^t^^^ii^ 

5.  Why  is  it  advantageous  for  the  gov§]3unent  to  repress  the  un-    '"/^ 
economical  ways  of  getting  a  living  PO'-^a/-'-^^  i/%^**-M  Vt Z*'*-*^  |<>'^V»^^'**^ 

6.  Why  is  it  better  to   get   what  you  want  by  makinttrypurself_^ 
useful  than  by  making  yourself  feared?  V^    /  •     '    '•''     '"Cj^^x^^^c^ 

7.  Why  are  civilized  men  more  prosperous  than  savages  ? -'>^«^*''*'y^'^ 


CHAPTER  XVI 
THE  EXTRACTIVE  INDUSTRIES 

In  the  last  chapter  the  rather  obvious  fact  was  stated  that  the 
prosperity  of  the  nation  depends  upon  the  usefulness  of  its  citizens. 
One  of  the  surest  ways  of  increasing  the  usefulness  of  the  average 
citizen  is  to  make  it  possible  for  him  to  win  prosperity  for  himself 
by  making  himself  so  useful  that  others  will  be  glad  to  pay  him 
well  for  his  usefulness ;  that  is,  for  his  product  and  his  service. 
In  the  next  few  chapters  we  shall  consider  some  of  the  leading 
forms  which  this  usefulness  takes.  In  other  words,  we  shall 
consider  some  of  the  leading  t3^es  of  useful  industries  and 
occupations. 

The  primary  industries.  As  shown  in  the  diagram  in  the 
preceding  chapter,  the  primary  industries  are  subdivided  into  two 
classes — the  extractive  and  the  genetic.  Extractive  industries  are 
those  which  merely  appropriate  natural  objects,  without  any  at- 
tempt to  replace  what  is  taken  or  to  keep  up  and  increase  the 
supply.  The  genetic  industries,  which  might  almost  be  called 
creative,  are  those  primary  industries  which  make  a  conscious 
effort  to  replace  that  which  is  taken  and  to  increase  the  supply. 
Thus,  hunting  wild  animals  and  grazing  domesticated  animals  on 
wild  grass  are  extractive  industries,  whereas  tillage  and  stock 
breeding  are  genetic.  Lumbering  or  cutting  timber  in  a  natural 
forest  is  extractive,  whereas  forestry,  the  scientific  growing  of 
timber,  is  genetic. 

Hunting.  Of  all  the  industries  hunting  is  the  most  primitive. 
It  was  sometimes  combined  with  fishing  as  a  means  of  subsistence. 
It  usually  included  the  search  for  edible  fruits,  nuts,  and  vege- 
tables, as  well  as  the  killing  of  animals ;  and  it  sometimes  even 
degenerated  into  a  man  hunt — that  is,  the  hunting,  killing,  and 
robbing  of  men.   Where  animals  constituted  the  most  abundant 

132 


tn    <U 


134  ELEMENTARY  ECONOMICS 

source  of  food,  primitive  men  quite  naturally  hunted  animals. 
Where  fruits,  nuts,  and  edible  roots  were  abundant  it  was  not 
uncommon  for  the  search  for  these  foods  to  become  the  chief 
occupation.  The  hunting  of  animals  led  naturally  to  domestication 
and  herding,  and  the  search  for  fruits  and  herbs  led  quite  as 
naturally  to  horticulture  as  the  next  stage  in  industrial  develop- 
ment. Our  own  primitive  ancestors  seem  to  have  been  hunters, 
and  later  herdsmen,  before  they  took  up  agriculture. 

Hunting,  which  includes  trapping,  has  played  an  important  part, 
and  still  plays  an  appreciable  part,  in  our  national  economy.  The 
abundance  of  game  on  our  Western  frontier,  when  we  had  a 
frontier,  was  an  important  source  of  food  for  the  advance  army 
of  settlers.  The  emigrants  who  crossed  the  great  plains  in  the 
early  settlement  of  the  mountain  states  and  the  Pacific  coast  also 
benefited  to  a  certain  extent  from  the  herds  of  buffalo,  deer,  elk, 
and  antelope  which  at  one  time  abounded.  More  important,  how- 
ever, was  the  regular  business  of  trapping  fur-bearing  animals  and 
of  trading  with  the  Indians  for  the  skins  and  furs  which  they 
collected.  A  great  deal  of  the  history  of  our  frontier,  beginning 
with  the  first  settlements  on  the  Atlantic  coast  and  continuing 
across  the  continent,  has  been  a  history  of  the  fur  trade.  Many  of 
our  Western  pioneers,  guides,  and  scouts,  of  whom  Kit  Carson  was 
the  most  famous,  began  their  careers  as  hunters  and  trappers  for 
various  fur-trading  companies.  The  story  of  their  adventures  adds 
a  romantic  element  to  the  early  history  of  our  Far  West,  but  they 
were  making  their  living  by  gathering  furs  to  supply  the  demands 
of  commerce. 

Fishing.  While  hunting,  as  a  source  of  national  wealth,  tends 
to  decline  in  importance  as  the  country  develops,  fishing  seems  to 
increase.  One  reason  for  the  decline  of  hunting  is  the  simple  fact 
that  land  becomes  too  valuable  for  other  purposes  to  be  allowed  to 
remain  in  its  wild  state  as  a  refuge  or  feeding-ground  for  wild 
animals.  When  it  is  turned  to  other  purposes  most  of  those 
animals  must  of  necessity  disappear.  The  same  is  apparently 
true  of  the  fish  in  many  inland  streams  which  once  furnished 
small  quantities  of  this  kind  of  food.    But  the  larger  lakes,  and 


THE  EXTRACTIVE  INDUSTRIES  135 

especially  the  oceans,  furnish  an  almost  inexhaustible  supply  of 
excellent  food.  As  population  and  the  demand  for  food  increase, 
the  harvest  of  the  sea  assumes  a  more  and  more  important  part 
in  our  national  economy. 

Pasturage.  It  would  be  impossible  to  estimate  how  much  the 
civilized  races  of  the  north  temperate  zone  owe  to  such  domestic 
animals  as  the  horse,  the  ass,  the  cow,  the  sheep,  the  goat,  and 
the  pig.  All  these  animals  have,  at  one  time  or  another,  furnished 
food  for  man.  The  horse  and  the  ox  have  furnished  that  which 
has  played  almost  as  important  a  part  as  food  in  man's  conquest 
of  nature  ;  namely,  power.  Before  steam  and  electricity  had  been 
harnessed,  or  water  power  developed,  these  animals  were  almost 
the  only  sources  of  power  besides  human  muscles.  The  skins  of 
all  were  and  are  still  utilized,  there  being  no  very  good  substitute 
for  leather  even  to  this  day.  The  cow  and  the  goat  have  furnished, 
and  still  furnish,  milk — one  of  our  most  important  articles  of  diet. 
The  wool  of  the  sheep  is  even  now,  next  to  cotton,  the  most  im- 
portant material  for  the  manufacture  of  clothing. 

In  their  native  state  all  these  animals  except  the  pig  lived  almost 
exclusively  upon  grass,  either  green  or  dried  in  the  form  of  hay, 
and  they  still  depend  mainly  upon  it.  Even  the  pig,  with  his  om- 
nivorous appetite  and  his  accommodating  stomach,  will  thrive  on 
grass  as  his  chief  article  of  diet,  though  he  needs  some  more  con- 
centrated food  in  addition  if  he  is  to  make  his  best  growth.  Grass 
and  grazing  have  therefore  played  a  very  important  part  in  the 
economic  life  of  that  branch  of  the  human  race  from  which  we  are 
derived.  Our  ancestors  were  already  herdsmen  before  they  emerged 
from  prehistoric  darkness.  All  the  animals  now  under  domestica- 
tion and  all  the  fowls  except  the  turkey  were  domesticated  so 
long  ago  that  we  have  no  record  as  to  where  or  when  it  occurred. 
It  may  give  us  a  new  respect  for  those  prehistoric  ancestors  of 
ours  when  we  reflect  that  we  have  never  succeeded  in  thoroughly 
domesticating  any  quadruped  since  we  have  had  a  history,  though 
we  may  soon  succeed  with  the  zebra. 

Grazing  on  our  Western  frontier.  From  the  earliest  settle- 
ments in  the  territory  now  occupied  by  the  United  States,  grazing 


136  ELEMENTARY  ECONOMICS 

has  been  an  important  industry.  Following  closely  in  the  wake 
of  the  hunters,  trappers,  and  fur  traders,  and  in  advance  of  the 
farmers,  have  gone  the  herdsmen.  The  wild  grasses  furnished  a 
ready  source  of  income  to  the  man  who  possessed  animals  capable 
of  turning  them  into  salable  products.  The  frontier  settlements 
in  colonial  New  England  possessed  large  herds  of  cattle,  and  down 
to  1820  beef  was  one  of  the  principal  exports.  Hogs  ran  wild  in 
the  woods,  and,  living  as  they  did  on  roots  and  mast,  they  fur- 
nished an  abundant  supply  of  meat.  Horses  were  exported  in  con- 
siderable numbers.  After  the  danger  from  wolves  was  reduced, 
sheep  were  grown  in  large  numbers.  In  Virginia  and  the  Carolinas 
grazing  developed  even  more  rapidly. 

Cattle  ranching.  When  the  advance  waves  of  settlement 
reached  the  great  prairies  of  the  West  the  grazing  industry  entered 
a  new  phase.  Those  natural  meadows  of  vast  extent  furnished 
a  much  more  abundant  pasturage  than  had  the  great  forest 
which  had  covered  the  eastern  third  of  the  country.  On  these 
Western  prairies — the  former  home  of  countless  herds  of  buffalo, 
deer,  elk,  and  antelope,  all  of  which  were  grazing  animals — 
cattle  and  sheep  were  very  economically  produced  and  would  have 
been  enormously  profitable  had  not  the  prices  of  beef,  mutton, 
wool,  and  hides  fallen  so  low  as  barely  to  cover  the  low  cost  of 
production.  Dwellers  in  Eastern  cities  enjoyed  abnormally  cheap 
meat  and  continued  to  do  so  until  the  very  end  of  the  nineteenth 
century,  since  which  time  meat  prices  have  been  gradually 
approaching  a  normal  level  again. 

Lumbering.  Next  to  grass  the  most  valuable  natural  product 
of  the  soil  is  timber.  Though  this  is  sometimes  called  the  age  of 
steel,  wood  is  still  an  important  and  almost  indispensable  mate- 
riaL  The  first  settlers  on  our  Atlantic  seaboard  found  a  dense 
and  apparently  limitless  forest  extending  from  the  coast  westward. 
It  was  not  until  well  into  the  nineteenth  century  that  the  advance 
guard  of  the  army  of  Western  migration  began  to  emerge  from  this 
forest  onto  the  great  prairies  of  the  West.  Timber  was  so  abundant 
as  scarcely  to  be  considered  an  economic  good.  Certainly  the 
settlers  had  little  occasion  to  economize  it.    The  best  of  it  they  used 


138  ELEMENTARY  ECONOMICS 

rather  lavishly ;  the  rest  they  destroyed  in  order  that  they  might 
use  the  land  for  things  which  they  needed  more  than  they 
needed  timber.  Along  the  northern  tier  of  states  the  great  forest 
extended  as  far  west  as  Minnesota.  In  the  middle  strip  the  prairies 
began  in  parts  of  northern  Indiana.  Farther  south  the  forest  fol- 
lowed the  Ohio  valley  to  the  Mississippi  and  extended  beyond 
through  central  and  southern  Missouri,  Arkansas,  and  Louisiana 
into  portions  of  eastern  Kansas,  Oklahoma,  and  Texas.  Other 
forests  were  found  in  the  high  mountains  of  the  West,  but  the 
finest  of  all  were  found  in  the  region  of  Puget  Sound  in  our  extreme 
Northwest. 

After  the  first  onslaught  of  the  settlers,  who  were  bent  on  get- 
ting rid  of  the  timber  in  order  to  clear  the  land  for  cultivation, 
lumbering  became  a  regular  business  in  every  part  of  our  forested 
area.  Its  greatest  development  was  in  lands  which  were  not  the 
most  valuable  for  agricultural  purposes.  Along  our  northern 
border,  where  the  climate  was  somewhat  severe  and  where  the  soil 
was  rather  light  and  sandy,  the  timber  was  not  destroyed  in  order 
to  clear  the  land,  because  better  lands  were  available  farther 
south.  When  the  timber  of  this  northern  strip  came  to  have  a 
commercial  value  it  became  the  scene  of  lumbering  on  a  large 
scale.  Large  companies  were  formed,  thousands  of  men  were  em- 
ployed, and  great  fortunes  were  made.  Lumbering  in  this  region, 
particularly  along  the  Great  Lakes  and  the  upper  tributaries  of 
the  Mississippi  River,  where  water  transportation  was  cheap, 
developed  rapidly  during  the  latter  half  of  the  nineteenth  century 
and  then  declined  rapidly. 

A  similar  development  took  place  in  the  Southern  states.  Here 
the  greatest  activity  was  along  the  southern  coast,  just  outside  of 
the  Cotton  Belt ;  that  is,  on  land  which  was  not  cleared  primarily 
for  the  purpose  of  growing  cotton,  but  where  the  timber  was  left 
standing  until  it  had  acquired  a  commercial  value  through  the 
increased  demand  and  the  improvement  of  transportation  facil- 
ities. The  most  valuable  timber  tree  of  this  belt  was  the  yellow 
pine,  as  the  white  pine  had  been  of  the  northern  belt. 


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140  ELEMENTARY  ECONOMICS 

The  greater  part  of  our  original  virgin  forest  has  now  been  de- 
stroyed. Such  cut-over  lands  as  are  not  suitable  for  other  purposes, 
or  are  not  needed  immediately  for  agriculture,  will  undoubtedly 
be  allowed  to  reforest  themselves  or  be  reforested  by  scientific 
methods,  but  it  is  safe  to  say  that  the  days  of  cheap  and  abundant 
timber  in  this  country  are  passed.  From  this  time  forward  careful 
conservation  will  be  necessary  in  order  to  safeguard  an  adequate 
supply. 

Mining.  The  greatest  of  all  our  extractive  industries  is  mining. 
Within  the  boundaries  of  the  United  States  are  found  a  wealth  and 
variety  of  minerals  such  as  no  other  country  is  known  to  possess, 
though  no  one  knows  what  new  discoveries  may  yet  be  made  in 
this  and  other  lands. 

Notable  among  our  mineral  products  are  the  following.  The 
values  given  are  for  the  year  19 17. 

P    ,  J  Bituminous $1,249,272,837 

t.  Anthracite 283,650,723 

jj.Qj^fOre 238,260,444 

iPig 1,053,785,975 

Copper 514,911,000 

Petroleum 522,635,213 

Natural  gas 140,000,000 

Gold 83,750,700 

Silver,  lead,  zinc,  aluminum,  cement,  building  stone,  lime,  and 
salt  are  also  valuable  products,  besides  many  others  of  less  value. 
Our  total  mineral  production  for  the  year  19 15  aggregated  more 
than  two  and  a  third  billions  of  dollars. 

Since  minerals  are  not  reproduced  or  replaced  when  once  ex- 
tracted from  the  earth,  it  is  only  a  question  of  time  before  all  of 
our  rich  deposits  will  be  exhausted.  In  some  cases  the  deposits 
are  so  enormous  as  to  remove  the  time  of  their  exhaustion  far 
into  the  future,  so  far  that  it  is  difficult  for  us  to  realize  that  it  is 
coming.  Authorities  agree  that  our  coal  deposits  will  last  for 
many  hundreds  of  years,  some  say  many  thousands  of  years.  If, 
however,  we  have  enough  coal  to  last,  let  us  say,  for  only  a 
thousand  years,  it  is  a  difficult  question  to  decide  to  what  extent 


142  ELEMENTARY  ECONOMICS 

that  should  give  us  concern  for  the  future  welfare  of  our  country. 
With  the  progress  of  invention  we  may  find  other  sources  of  heat 
and  power  before  our  coal  is  gone.  Probably  our  best  policy  is 
merely  to  avoid  unreasonable  waste  or  destruction,  of  mineral 
resources  andTthen  leave  future  generations  to  work  ^jut^heir  own 
pioblemst  ^ 

Instability  of  the  extractive  industries.  All  our  extractive  in- 
dustries have  not  only  added  greatly  to  our  material  wealth,  they 
have  likewise  given  rise  to  picturesque  but  somewhat  unstable 
phases  of  our  social  life.  The  early  hunters  and  trappers  were  a 
hardy,  adventurous  race,  whose  deeds  and  prowess  have  become  a 
part  of  our  national  history.  Our  herdsmen  likewise,  especially 
those  who  developed  the  cattle  business  on  the  Great  Plains, 
supplied  an  element  of  romance  and  adventure  which  still  appeals 
to  the  imagination  of  our  young  people.  Our  hardy  fishermen  and 
whalers  have  given  splendid  examples  of  the  courage  and  strenuos- 
ity  which  can  wrest  a  living  from  the  unconquerable  ocean.  Our 
lumber  camps  and  our  mining  camps  have  drawn  adventurous 
characters  from  the  ends  of  the  earth  and  furnished  much  excellent 
material  for  the  story -writers.  But  instability  is  a  characteristic 
of  these  industries  and  consequently  of  the  life  which  grew  up 
around  them.  Stability  can  be  supplied  to  our  national  life  only 
by  industries  which  are  themselves  self -perpetuating.  The  genetic 
industries  must  supply  that  need.  "ff^jji^  6Z4 

,W^  ^,•7;^^^^""^''^   EXERCISES  ^ 

1.  what  are  the  extractive  industries,  and  why  are  they  so  called? 

2.  What  part  has  hunting  played  in  our  national  history? 
'^    3.  What  part  has  fishing  played?-,''  ,  ;^ 

fv^*^^**"  4.  What  is  the  most  valuable  natural  or  wild  product  of  our  soil  ? 
r^  i'A    5.  What  part  has  gptziiu;  pl^y^^  in.-our  national  history  ? ''  ^     • 
^  6.  In  what  sectioife  of  this  cpintry  did  lumbering  develop  on  the 

largest  scale?  f     C  t- ^'      P  -iJ  r  ^  ^     .1     '  ~ ' 

7.  Which  is  the  greatest  of  our  extractive  industries  ?-.--'~ 

8.  Is  it  likely  that  a  stable  civilization  can  be  built  up  on  the  extrac- 
tive industries  alone  ? 


CHAPTER  XVII 

THE  GENETIC  INDUSTRIES 

What  are  the  genetic  industries?  By  the  genetic  indus- 
tries are  meant  those  in  which  men  make  conscious  and  systematic 
efforts  to  direct  the  biological  processes  of  reproduction  so  as  to 
increase  the  supply_of-desirable_p]ants  and  animals.    The  greatest 


of  these  is  agriculture,  though  forestry  and  fish  culture  are  also 
included.  Agriculture,  however,  is  sometimes  carried  on  in  such 
a  slipshod  manner  as  scarcely  to  deserve  to  be  classed  as  a 
genetic  industry.  A  genuinely  genetic  type  of  agriculture  can 
endure  and  even  improve  for  indefinite  periods  of  time  on  the  same 
soil ;  that  is,  it  not  only  preserves  but  improves  the  fertility  of 
the  soil,  generation  after  generation,  for  hundreds  and  thousands 
of  years.  It  thus  makes  possible  a  stable,  an  enduring,  and  an 
expanding  civilization,  such  as  could  not  be  supported  exclusively 
by  any  of  the  extractive  industries. 

Demand  of  all  outdoor  industries  for  space.  All  of  those  in- 
dustries which  appropriate  or  increase  the  products  of  the  soil, 
such  as  hunting,  grazing,  lumbering,  forestry,  and  farming,  have 

143 


144  ELEMENTARY  ECONOMICS 

one  characteristic  in  common.  They  all  require  a  great  deal  of 
space  as  compared  with  mining  and  the  secondary  industries,  such 
as  manufacturing  and  merchandising.  So  great  is  this  demand 
for  space  on  the  part  of  those  industries  which  gather  in  or  develop 
the  products  of  the  soil  that  it  is  impossible  to  house  them,  and 
they  are  of  necessity  outdoor  industries.  Moreover,  those  who 
engage  in  them  must  of  necessity  spread  themselves  over  wide 
areas.  They  are  compelled  by  the  nature  of  their  industries  to 
live  in  scattered  homes  or  in  small  villages  located  far  apart. 
Living  so  far  apart,  with  plenty  of  room,  in  close  contact  with 
nature  but  in  little  contact  with  other  men  because  of  the  distances 
between  them,  produces  a  profound  reaction  upon  their  lives  and 
characters.  It  is  sometimes  difficult  for  indoor  and  outdoor  people 
to  understand  one  another. 

Stages  in  the  economy  of  land.  We  have  seen  in  the  last  chap- 
ter that  the  utilization  of  the  soil,  not  only  on  our  own  frontier 
but  also  in  the  development  of  civilized  life  among  our  remote 
ancestors,  passed  through  several  distinct  stages,  such  as  the 
hunting  stage,  the  grazing  stage,  and  the  agricultural  stage.  These 
are  progressive  stages  in  the  economizing  of  land.  It  takes  a  great 
deal  more  land  to  support  a  given  population  by  hunting  than  by 
grazing,  and  by  grazing  than  by  agriculture.  When  game  grew 
scarce,  or  when  population  increased,  those  who  had  the  wisdom  to 
make  the  change  were  forced  into  grazing  and  then  into  tillage,  in 
order  to  increase  their  means  of  subsistence.  That  hunting  was 
an  uneconomical  use  of  land  may  be  inferred  from  the  fact  that 
there  were  never,  according  to  the  best  authorities,  more  than  one 
million  Indians  within  the  boundaries  of  the  present  United  States. 
This  territory  now  supports  approximately  a  hundred  times  that 
number  of  people  and  supports  them  more  comfortably  than  the 
Indians  were  supported.  It  is  primarily  through  tillage  that  this 
territory  is  now  made  to  yield  so  much  more  subsistence. 

Tillage.  Tillage  consists  essentially  of  three  processes :  first, 
preparing  a  good  seed  bed,  in  which  plants  can  grow  more 
vigorously  than  in  natural,  or  unprepared,  soil ;  second,  planting 
in  this  bed  the  seeds  of  such  plants  as  are  deemed  more  useful  or 


>  Underwood  &  Underwood,  N.Y. 

A  BEAUTIFUL  BRIDGE  AND  A  HUGE  IRRIGATION  DAM  COMBINED 

By  means  of  this  dam  across  the  Upper  Rio  Grande  in  New  Mexico,  water 
will  be  stored  for  the  irrigation  of  thousands  of  acres  of  dry  land 


146  ELEMENTARY  ECONOMICS 

desirable ;  and,  third,  destroying  all  other  plants,  commonly  called 
weeds,  which  may  start  to  grow  in  competition  with  the  plants 
whose  seeds  were  planted. 

The  law  of  diminishing  returns.  It  is  possible,  however,  to 
carry  tillage  so  far  as  to  produce  undesirable  results,  or  to  try  to 
grow  so  much  per  acre  as  to  reduce  the  product  per  man.  It  is  this 
phase  of  the  question  of  economy  that  is  commonly  known  as  the 
law  of  diminishing  returns  from  land.  This  law  is  simply  that, 
after  a  certain  amount  of  labor  with  the  appropriate  tools  has 
been  applied  to  the  cultivation  of  a  given  crop  on  a  given  piece  of 
land,  further  applications^  of  labor  to  the  same  land  do  not  yield 
proportional  returns.  They  may  increase  the  crops  slightly,  thus 
increasing  the  yield  per  acre,  but  they  will  not  increase  the  crop 
in  proportion  as  the  labor  is  increased.  The  result  is  a  decrease 
in  proportion  to  the  number  of  units  of  labor. 

The  great  law  of  productivity.  This  law  of  diminishing  re- 
turns has  been  called  the  great  law  of  agricultural  production.  It 
is  a  part  of  a  wider  law,  which  may  be  called  the  law  of  variable 
proportions^  and  which  is  the  fundamental  law  of  all  production. 
For  the  present  it  is  sufficient  to  point  out  that  it  presents  the  prob- 
lem of  balancing  the  different  factors  which  have  to  be  combined 
in  production.  It  is  much  the  same  problem  at  bottom,  whether 
it  be  the  balancing  of  the  different  elements  of  plant  food  in  fer- 
tilizers or  of  the  different  elements  of  animal  food  in  the  feeding  of 
cattle,  the  balancing  of  such  factors  as  labor,  land,  and  capital  in 
running  a  farm  or  a  factory,  or  the  balancing  of  the  different  kinds 
of  people  that  make  up  a  nation. 

The  largest  industry.  Agriculture  is  not  merely  one  of  the 
basic,  or  primary,  industries ;  it  is  the  most  important  of  all 
industries,  if  we  consider  the  world  at  large  or  any  large  section 
of  it  which  is  compelled  to  live  within  itself.  Considerable  sec- 
tions of  country  and  considerable  masses  of  population  may  live 
primarily  by  the  indoor  industries,  sending  out  their  surplus  prod- 
uce to  distant  lands  and  bringing  back  in  exchange  the  products 
of  the  soil.  Thus,  a  country  like  England,  or  considerable  portions 

}  For  a  fuller  discussion  see  chapter  on  the  Law  of  Variable  Proportions. 


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148  ELEMENTARY  ECONOMICS 

of  our  own  country,  such  as  southern  New  England,  may  become 
largely  urbanized  ;  that  is  to  say,  the  greater  portion  of  the 
people  may  engage  in  indoor  rather  than  in  outdoor  industries. 
But  they  live  by  selling  the  products  of  their  indoor  industries  to 
people  far  beyond  their  own  boundaries  and  bringing  in  from  the 
ends  of  the  earth  the  products  of  the  soil. 

The  United  States  as  a  whole  is  tending  to  become  an  ur- 
banized nation ;  that  is,  it  is  tending  toward  a  condition  where 
more  than  half  of  its  people  will  work  indoors  rather  than  out- 
doors. Again,  there  is  a  tendency  in  the  world  at  large  for 
the  indoor  industries  to  gain  somewhat  in  importance  as  com- 
pared with  the  outdoor  industries,  though  it  is  unlikely  that  the 
former  will  ever  actually  overtake  the  latter. 

Why  agriculture  is  losing  ground.  As  civilization  advances, 
people  tend  to  demand  finer  and  finer  products  for  consumption. 
Usually,  though  not  in  every  case,  producing  a  finer  product 
means  doing  more  work  in  the  final,  or  finishing,  stages.  It  takes 
no  more  wool  or  cotton,  and  therefore  it  takes  no  more  agricul- 
tural labor,  to  make  fine  than  coarse  clothing.  The  difference  is 
mainly  in  the  amount  of  work  which  is  put  upon  the  material 
after  it  leaves  the  farm.  In  other  words,  of  the  total  work  put 
upon  material  for  fine  clothes,  a  smaller  proportion  than  for 
coarse  clothes  is  outdoor  labor  and  a  larger  proportion  is  indoor 
labor.  The  same  principle  applies  to  shoes,  furniture,  vehicles, 
and  many  articles  of  food. 

Another  and  more  important  fact  is  the  increased  use  of  agri- 
cultural machinery.  Fewer  men  are  now  needed  in  the  actual 
cultivation'  of  the  land,  as  some  of  the  work  is  done  in  the  fac- 
tories where  farm  machinery  is  made.  Whereas  all  the  men  who 
formerly  helped  in  the  harvesting  of  a  wheat  crop  actually  worked 
in  the  field,  now  some  of  them  work  in  the  shops  and  factories 
making  harvesting  machinery.  The  same  change  has  taken  place 
with  respect  to  many  other  kinds  of  farm  work. 

Influence  of  occupation  on  character.  There  is  oije  leading  in- 
dustry in  which  success  depends  primarily  upon  the  ability  to 
deal  efficiently  with  nature  and  natural  forces ;  that  is,  farming. 


A  LARGE  DAIRY  FARM  IN  CALIFORNIA 

Milk  is  the  most  economical  animal  food  known.   A  good  dairy  cow  will 
provide  more  food  in  a  year  than  a  beef  animal  will  produce  in  three  years 


150  ELEMENTARY  ECONOMICS 

In  most  of  the  others  success  depends  quite  as  much  on  ability  to 
deal  with  other  men  as  on  ability  to  deal  with  nature.  They  who 
get  their  living  out  of  the  soil  must  know  the  soil,  the  weather, 
the  times  and  seasons,  and  everything  that  will  affect  their  suc- 
cess, whereas  they  who  get  their  living  by  dealing  with  other  men 
must  know  the  ways  of  men. 

Commercial  agriculture.  Self-sufficing  agriculture  has  become 
a  thing  of  the  past,  and  we  are  developing  what  may  be  called 
commercial  agriculture ;  that  is,  a  system  of  agriculture  in  which 
the  farmer  is  a  buyer  and  seller,  a  dealer  with  other  men,  to  almost 
the  same  extent  as  a  city  business  man.  He  must  now  understand 
not  only  markets  but  political  and  social  conditions.  This  is 
tending  to  diminish  the  differences  betw^een  the  dwellers  in  the 
city  and  the  dwellers  in  the  country. 

The  independence  and  dependence  of  the  farmer.  We  are 
hearing  constantly  reiterated,  especially  by  advocates  of  the  back- 
to-the-land  movement,  that  the  farmer  is  the  most  independent 
person  in  the  world.  Probably  no  one  is  so  dependent  upon  out- 
ward physical  conditions  as  the  farmer.  He  must  continually  watch 
the  weather  and  guard  against  pests  of  all  sorts,  animal  diseases, 
and  even  town  marauders.  Every  year  lightning,  hail,  wind,  and 
floods  destroy  crops  in  some  part  of  the  country.  On  the  other 
hand,  the  indoor  worker  is  constantly  harassed  by  troubles  of 
human  origin,  such  as  political  elections,  commercial  crises, 
changes  of  fashion,  the  organization  of  dangerous  trusts  and 
monopolies,  labor  troubles,  and  advertisers. 

One  important  characteristic  of  agricultural  industry  is  its  de- 
pendence upon  the  seasons.  The  indoor  worker  is  frequently  able 
to  continue  uninterruptedly  in  one  kind  of  work,  week  after  week, 
month  after  month,  and  year  after  year.  From  the  very  nature 
of  the  case  this  is  impossible  in  agriculture,  for  every  crop  has 
its  growing-season  and  its  time  of  harvest.  On  every  farm  almost 
every  hour  of  the  day  has  its  own  special  work  to  be  done,  so 
that  work  is  continually  changing,  not  simply  from  season  to 
season,  from  month  to  month,  and  from  week  to  week,  but  even 
from  hour  to  hour. 


152  ELEMENTARY  ECONOMICS 

Country  people  generally  self-employed.  Perhaps  the  most  im- 
portant fact  concerning  agriculture  is  that  a  very  large  proportion 
of  those  engaged  in  it  are  self-employed,  whereas  the  vast  majority 
of  those  who  live  in  cities  are  employed  by  other  people.  The  fact 
that  farming  is  an  industry  of  small  units,  while  indoor  industries 
are  generally  industries  of  large  units,  produces  this  difference. 

Some  of  the  deepest  students  of  political  and  social  tendencies 
have  come  to  doubt  whether  democracy  can  ever  develop  to  a 
high  stage  of  efficiency  except  among  people  who  are  in  the  main 
self-employed.  It  is  true  that  modern  democracy  arose  first  in 
the  cities  and  towns,  but  it  is  likewise  true  that  at  that  time  the 
cities  and  towns  were  the  homes  of  self-employed  men.  Before 
the  rise  of  the  factory  system  such  manufacturing  as  was  done 
was  carried  on  in  small  shops  by  craftsmen  who  were  in  the  ma- 
jority of  cases  self-employed.  The  rural  districts,  however,  were 
under  the  feudal  system. 

Conditions  are  exactly  reversed  at  the  present  time.  Under  the 
factory  system  the  great  majority  of  people  in  the  indoor  indus- 
tries work  under  bosses.  Since  the  break-up  of  the  feudal  system 
and  the  rise  of  the  one-family  farm,  which  is  the  characteristic 
farm  in  this  country,  the  average  dweller  in  the  country  is  his  own 
boss.  This  may  have  something  to  do  with  the  fact  that  city 
politics  is  run  by  bosses  and  country  politics  is  not. 

Interdependence  of  the  sexes.  The  division  of  labor  between 
the  sexes  is  much  more  marked,  of  course,  in  agriculture  than  in 
indoor  industries.  There  are  many  operations  on  every  farm 
which  require  the  superior  muscularity  of  the  male.  This  makes 
it  difficult  for  women  to  compete  with  men  in  general  farm  work. 
At  the  same  time,  the  fact  that  the  farms  are  so  far  apart  makes 
it  impossible  for  these  muscular  males  to  get  along  without  women 
to  run  their  houses.  The  men  cannot  live  in  boarding  houses, 
because  that  would  make  it  necessary  to  live  too  far  from  work. 
Consequently  one  finds  in  our  rural  districts  fewer  old,  unmarried 
males  than  one  finds  infesting  our  cities  and  towns.  Moreover, 
there  are  comparatively  few  opportunities  for  a  woman  to  make  an 
independent  living  in  the  country. 


THE  GENETIC  INDUSTRIES  153 

Forestry.  Forestry  as  distinct  from  lumbering  has  only  re- 
cently received  attention  in  this  country.  In  order  to  be  an 
economic  success,  forestry  must  obviously  be  practiced  on  land 
which  would  produce  a  greater  value  at  lower  cost  when  planted 
to  trees  than  when  planted  to  anything  else.  Mountainous  and 
semimountainous  lands,  stony  or  swampy  lands,  and  lands  which 
for  other  reasons  are  unsuited  to  tillage  or  pasturage  furnish  the 
natural  opportunity  for  the  practice  of  forestry  on  a  large  scale. 
While  the  annual  product  in  the  form  of  the  annual  timber  growth 
is  small,  the  cost  is  likewise  small.  Since  such  land  would  other- 
wise go  to  waste  altogether,  it  is  better  to  get  even  a  small  product 
than  none  at  all. 

Scientific  forestry.  In  recent  years  the  federal  government  and 
several  of  the  states  have  created  forest  reserves.  Scientific 
forestry  is  being  practiced,  but  it  must  be  remembered  that  scien- 
tific forestry  in  this  country  is  necessarily  different  from  what  it 
is  in  old  countries.  In  a  country  where  lumber  is  still  cheap,  as 
compared  with  other  countries,  and  where  labor  is  dear  as  it  is 
in  this  country,  one  cannot  do  in  the  name  of  science  what  one  can 
do  in  an  old  country,  where  lumber  is  dear  and  labor  cheap. 
A  serious  problem  for  the  American  forester  is  to  keep  costs  down  ; 
unless  he  does  this  he  may  find  that  the  timber  is  not  worth  what 
it  costs  to  grow  it.  For  this  reason  it  is  not  the  custom  in  this 
country  to  do  much  planting  of  trees  or  preparation  of  the  ground. 
The  work  is  mainly  confined,  first,  to  cutting  out  undesirable 
growths  (in  order  to  give  the  more  desirable  trees,  which  are  in  the 
main  self-seeded,  a  chance  to  grow)  and,  second,  and  more  im- 
portant still,  to  guarding  against  forest  fires.  Our  summers,  which 
are  dry  compared  with  those  of  Europe,  make  the  forest  fire  the 
great  enemy  of  the  American  forester.  The  fight-againgt  diseases 
and  pests  is  a  third  task.  ^^^ 

Fish  culture.  Fish  culture  has  been  fostered  by  the  federal 
and  state  governments  of  the  United  States  and  by  various  private 
agencies.  Spawn  is  collected  and  hatched,  and  millions  of  young 
fish  are  distributed  in  our  streams  and  along  our  seacoasts. 
A  great  deal  of  study  is  being  given  to  the  habits  of  various  edible 


Crt        « 


5 


156  ELEMENTARY  ECONOMICS 

fishes  and  the  sources  of  their  food.  Private  enterprise  is  also 
active  in  stocking  streams  and  small  bodies  of  water  and  in  grow- 
ing fish  of  various  kinds  for  the  market. 

With  our  Great  Lakes  on  the  north,  the  ocean  on  the  east  and 
the  west,  and  the  Gulf  of  Mexico  on  the  south,  and  with  all  our 
noble  rivers,  we  have  access  to  such  vast  and  seemingly  inex- 
haustible supplies  of  fish  that  fish  culture  in  a  strict  sense  has  not 
developed  very  far  among  us.  Hatching  and  distributing  spawn, 
and  leaving  the  spawn  to  shift  for  itself  and  take  its  chances  along 
with  other  wild  fish,  is  a  step  in  the  right  direction,  but  it  stops 
far  short  of  the  work  of  the  animal  breeders  on  our  farms. 

Summary.  Our  particular  branch  of  the  human  race  has  been, 
for  many  generations,  a  pioneering  and  colonizing  race.  It  has 
been  spreading  over  new  and  sparsely  occupied  areas,  in  which 
natural  resources,  such  as  virgin  forests,  mineral  deposits,  wild 
game  and  fish,  and  excellent  grass  for  pasturage,  have  abounded. 
A  considerable  part  of  its  living  has  been  derived  from  the  mere 
appropriation  of  these  natural  resources.  When  the  time  comes, 
as  in  the  natural  order  of  things  it  soon  must,  when  there  are  no 
more  new  and  sparsely  occupied  lands  to  colonize,  the  extractive 
industries  must  decline  in  importance  as  a  part  of  our  national 
economy.  Then  we  must  depend  more  and  more  upon  the  genetic 
industries  for  subsistence  and  for  raw  materials.  This  growing 
importance  will  justify  our  giving  more  and  more  attention  to 
these  industries. 

EXERCISES 

1.  What  are  the  genetic  industries?   i'ly  3> 

2.  Why  are  genetic  industries  generally  outdoor  industries? 

3.  How  do  the  outdoor  industries  affect  the  lives  of  the  workers 
as  compared  with  the  way  in  which  the  indoor  industries  affect  them  ? 

4.  What  are  the  leading  stages  in  the  progressive  economy  of  land  ? 

5.  What  is  tillage? 

6.  What  is  the  law  of  diminishing  returns  ? 

7.  What  is  the  law  of  variable  proportions  ? 

8.  How  does  agriculture  compare  in  size  with  other  industries  (i)  in 
the  world  at  large  ?    (2)  in  your  part  of  the  world  ? 


IS8  ELEMENTARY  ECONOMICS 

9.  Is  agriculture  gaining  or  losing  ground  as  compared  with  the 
indoor  industries  ?    Why  ? 

10.  What  is  meant  by  commercial  agriculture? 

11.  Why  are  politics  generally  in  a  better  condition  in  country  than 
in  city  communities  ? 

12.  Are  women  more  independent  or  less  independent  in  the  country 
than  in  the  city  ?     Why  ? 

13.  Why  is  scientific  forestry  in  this  country  different  from  scientific 
forestry  as  practiced  in  older  countries? 

14.  How  is  fish  culture  carried  on  in  the  United  States? 


CHAPTER  XVIII 
THE  MANUFACTURING  INDUSTRIES 

Various  types  of  manufacturing  establishments.  One  kind 
of  manufacturing  establishment  which  is  still  numerous  and 
widely  distributed  is  the  small  shqp  where  the  worker  owns  his 
own  tools  and  equipment,  buys  his  own  raw  materials,  and  sells 
the  finished  product.  It  does  not  constitute  much  of  a  change, 
certainly  not  a  revolution,  when  he  hires  a  few  helpers  or  appren- 
tices to  assist  him.  They  work  with  his  tools  upon  his  raw 
materials,  and  they  receive  their  compensation  in  the  form  of 
wages  instead  of  in  the  form  of  a  share  of  the  profits  of  the  busi- 
ness. Even  where  the  owner  ceases  to  do  any  of  the  work  except 
to  keep  the  accounts,  buy  the  raw  materials  and  sell  the  products, 
and  exercise  general  supervision  and  management,  the  transition 
may  have  been  so  gradual  as  to  attract  no  one's  attention.  By 
this  gradual  change,  however,  a  type  of  manufactory  may  be 
developed  which  is  very  different  from  that  with  which  manufac- 
turing began. 

But  the  transition  is  not  always  made  in  this  way.  Other 
methods  of  organization  have  existed  at  various  times  and  still 
exist.  In  one  class  of  shops  the  worker  owns  his  own  tools  and 
runs  his  own  shop,  but  does  not  own  the  raw  materials  upon  which 
he  works.  These  are  furnished  by  an  outside  person  who  supplies 
them  and  owns  the  finished  product,  paying  the  worker  a  price 
agreed  upon  for  the  work  which  he  does.  In  this  case  also  the 
worker  may  hire  a  few  helpers  or  apprentices. 

Still  another  method  is  found,  where  the  worker  owns  neither 
the  materials  upon  which,  nor  the  tools  with  which,  he  works. 
A  third  person  supplies  both  materials  and  tools, — everything,  in 
fact,  except  the  place  in  which  the  work  is  done,  which  place 
the  laborer  himself  supplies. 

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i62  ELEMENTARY  ECONOMICS 

In  the  modern  factory,  however,  everything  is  assembled  in 
one  building  or  group  of  buildings,  around  one  power  plant ;  every- 
thing is  owned  by  one  group  of  individuals,  and  the  laborer 
furnishes  nothing  except  his  own  skill  and  strength.  The  great 
advantage  of  this  system  is  its  economical  use  of  power.  Wherever 
a  large  use  of  power  is  necessary,  it  is  important  that  it  be  effec- 
tively and  economically  utilized.  In  all  such  cases  the  modern 
factory  tends  to  displace  all  other  methods  of  manufacturing. 
Where  comparatively  little  power  is  required,  and  where,  there- 
fore, it  is  not  of  such  great  importance  that  power  be  economized, 
other  methods  still  survive.  In  some  cases,  however,  the  com- 
petition of  the  factory  is  so  severe  as  to  force  the  workers  in 
the  small  shops  to  work  for  very  low  wages.  Where  the  main 
factor  in  success  is  the  skill  of  the  worker  rather  than  cheap 
poyver,  the  small  shop  will  probably  continue  to  compete  success- 
fully with  the  large  factory,  but  where  cheap  power  is  the  main 
factor,  the  large  factory  will  probably  drive  out  the  small  shop. 

Tendency  toward  large-scale  production.  The  stages  of  this 
development  from  the  very  small  shop  to  the  factory  are  by  no 
means  clear.  Almost  every  form  of  manufacturing  will  be  found 
in  every  stage  of  economic  development.  The  large  factory  has 
come  to  be  the  dominant  form  only  since  the  invention  of  power- 
driven  machinery.  The  Industrial  Revolution,  as  it  is  called,  was 
the  rather  sudden  growth  of  the  factory  to  this  dominant  position 
during  the  latter  half  of  the  eighteenth  century. 

Power-driven  machinery  and  large-scale  production.  A  re- 
markable series  of  inventions  followed  one  another  in  rapid  suc- 
cession and  transformed  several  of  the  large  industries  of  England 
into  factory  industries.  These  changes  put  England  definitely  in 
the  lead  as  a  manufacturing  nation.  The  same  revolution  came  in 
other  countries  a  little  later. 

Says  Marshall^: 

The  quarter  of  a  century  beginning  with  1760  saw  improvements 
follow  one  another  in  manufacture  even  more  rapidly  than  in  agricul- 
ture.   During  that  period  the  transport  of  heavy  goods  was  cheapened 

*  Alfred  Marshall,  Principles  of  Economics  (4th  ed.).  p.  42.   London,  1898. 


)  Underwood  &  Underwood,  N.Y. 

ROLLING  MILL  AT  WORK    ' 


1 

K 

i 

i 

1 
■ 
(in 

.■ 

4 

SPINNING  BY  HAND,  ALMOST  A  LOST  ART 


A  SPINNING-ROOM  IN  A  MODERN  COTTON  MILL 


1 66  ELEMENTARY  ECONOMICS 

by  Brindley's  canals,  the  production  of  power  by  Watt's  steam  engine, 
and  that  of  iron  by  Cort's  processes  of  puddling  and  rolling  and  by 
Roebuck's  method  of  smelting  it  by  coal  in  lieu  of  the  charcoal  that 
had  become  scarce ;  Hargreaves,  Crompton,  Arkwright,  Cartwright,  and 
others  invented,  or  at  least  made  economically  serviceable,  the  spinning 
jenny,  the  mule,  the  carding  machine,  and  the  power  loom  ;  Wedg- 
wood gave  a  great  impetus  to  the  pottery  trade  that  was  already 
growing  rapidly ;  and  there  were  important  inventions  in  printing  from 
cylinders,  in  bleaching  by  chemical  agents,  and  in  other  processes.  A  cot- 
ton factory  was  for  the  first  time  driven  directly  by  steam  power  in 
1785,  the  last  year  of  the  period.  The  beginning  of  the  nineteenth 
century  saw  steamships  and  steam  printing  presses,  and  the  use  of  gas 
for  lighting  towTis.  Railway  locomotives,  telegraphy,  and  photography 
came  a  Httle  later.  Our  own  age  has  seen  numberless  improvements 
and  new  economies  in  production,  prominent  among  which  are 
those  relating  to  the  production  of  steel,  the  telephone,  the  electric 
light,  and  the  gas  engine ;  and  the  social  changes  arising  from  material 
progress  are  in  some  respects  more  rapid  than  ever.  But  the  ground- 
work of  the  changes  that  have  happened  since  1785  was  chiefly  laid 
in  the  inventions  of  the  years  1760  to  1785. 

Decay  of  small  industries.  Scarcely  less  striking  would  be  an 
account  of  the  rise  of  machine  production  in  other  industries,  fol- 
lowing the  use  of  steam  power  and  cheap  iron  and  steel.  Shoe 
manufacturing,  the  grinding  of  flour,  the  slaughtering  of  meat  ani- 
mals and  the  curing  and  packing  of  meat,  the  manufacture  of 
watches,  automobiles,  etc.,  and  various  other  industries  have  shown 
the  same  tendency  toward  the  factory  system  of  production. 
Regarding  changes  in  our  own  country  Professor  Ely  writes^: 

Let  the  reader  call  to  mind  the  many  things  in  our  economic  life 
which  the  world  never  saw  before.  He  will,  of  course,  think  at  once 
of  the  railway  and  of  steam  navigation,  and  of  other  applications  of 
steam  to  industry.  But  these  have  brought  other  important  new 
phenomena.  The  concentration  of  large  masses  of  working-people  in 
great  factories  of  which  they  own  no  part,  and  under  a  single 
employer,  such  as  we  see  daily,  is  something  new  for  skilled  mechan- 
ics ;  not  that  nothing  of  the  kind  ever  existed  before,  but  its  existence 
is  so  much  more  common  and  affects  so  many  more  people  that  in  its 

1  Richard  T.  Ely,  An  Introduction  to  Political  Economy,  pp.  5 5-57 •  New 
York,  Chautauqua  Press,  1889. 


THE  MANUFACTURING  INDUSTRIES  167 

social  aspects  it  is  new.  In  the  last  century,  and  in  previous  centuries 
of  the  Middle  Ages,  artisans  owned  the  tools  which  they  used,  and 
after  they  had  fully  mastered  their  trades  usually  called  no  man 
master,  but  worked  in  their  own  little  shops.  Even  within  the  memory 
of  the  author,  still  comparatively  a  young  man,  this  condition  of  things 
has  become  less  common.  The  smith,  under  the  spreading  tree,  of 
whom  Longfellow  sang,  is  disappearing.  He  has  left  the  crossroads 
in  the  little  village  and  now  works  in  a  machine  shop.  His  friends, 
the  carpenter  and  the  shoemaker,  have  accompanied  him.  A  few 
artisans  may  stay  to  do  repairing  and  other  small  work,  but  the  cheaper 
processes  of  vast  establishments  have  rendered  this  migration  inevitable 
for  the  many.    Only  the  few  among  artisans  can  live  in  the  old  style. 

Tendency  of  mechanically  expert  nations  toward  indoor 
industries.  Large  portions  of  the  world's  population  still  remain 
in  a  condition  of  mechanical  inexpertness.  They  find  it  more 
advantageous  to  live  from  the  products  of  the  soil,  exchanging 
these  products  for  the  manufactured  products  of  the  mechanically 
expert.  Other  populations,  like  those  of  our  own  West,  while 
mechanically  expert,  occupy  land  of  such  abundance  and  fer- 
tility as  to  enable  them  to  prosper  more  by  cultivating  land 
than  by  turning  to  indoor  industries.  They  use  their  mechanical 
expertness  in  contriving  and  operating  farm  machinery.  They  ex- 
change their  large  surplus  of  farm  products  for  the  manufactured 
products  of  other  people  who  are  also  mechanically  expert  and 
who  occupy  lands  of  less  extent  and  lower  fertility.  The  latter, 
not  having  vast  areas  to  cultivate,  find  less  profitable  opportu- 
nities for  their  mechanical  expertness  out  of  doors  than  indoors. 
Therefore  they  develop  the  indoor  industries,  England,  which  got 
a  good  start  ahead  of  the  rest  of  the  world  in  this  line  of  develop- 
ment, prospered  amazingly.  The  eastern  part  of  the  United  States, 
together  with  France,  Belgium,  Holland,  and  lately,  Germany,  has 
been  following  in  the  same  direction. 

Taking  the  United  States  as  a  whole,  it  is  rapidly  ceasing  to  be 
primarily  an  agricultural  country  and  is  becoming  a  manufacturing 
country,  following  a  similar  development  in  England  and  north- 
western Europe.  Canada,  South  America,  Australia,  South  Africa, 
and  all  countries  where  white  men  colonize  will  doubtless  follow 


1 68  ELEMENTARY  ECONOMICS 

in  the  same  direction.  There  will  then  be  left  only  the  tropics  in 
which  to  sell  the  surplus  products  of  manufacture  and  from  which 
to  draw  the  surplus  products  of  the  soil.  It  is  probable  that  the 
development  of  the  indoor  industries  will  be  checked  before  that 
state  is  reached.  In  that  case  each  country  will  have  to  preserve 
a  balance,  or  equilibrium,  between  the  indoor  and  the  outdoor 
industries. 

Why  more  work  has  to  be  done  indoors.  As  pointed  out  in 
the  chapter  on  the  Genetic  Industries,  the  advance  in  civilization 
and  the  general  improvement  of  living  conditions  tend  to  add  to 
the  relative  importance  of  the  indoor  as  compared  with  the  out- 
door industries.  The  finer  the  goods  we  demand,  the  more  work 
we  make,  generally  speaking,  for  the  indoor  workers.  Even  farm 
work  itself  comes,  in  a  sense,  to  be  done  indoors  rather  than  out- 
doors. The  substitution  of  the  tractor  for  the  horse  may  serve  to 
illustrate  this  statement.  The  raising  of  horses  is  outdoor  work ; 
the  manufacturing  of  tractors  is  indoor  work.  If  we  use  more 
tractors  and  fewer  horses  a  larger  proportion  of  our  workers 
will  work  indoors  and  a  smaller  proportion  outdoors. 

This  is  a  process  which  must  be  expected  to  continue  even 
though  we  remain  a  self-sufficing  nation.  If,  ceasing  to  be  a 
self-sufficing  nation,  we  bring  raw  materials  and  products  of  the 
soil  from  distant  portions  of  the  earth  and  send  in  exchange 
the  more  refined  products  of  the  indoor  industries,  we  must  expect 
that  manufacturing  will  become  in  larger  and  larger  degree  our 
dominant  occupation.  This  will  bring  in  its  train  many  conse- 
quences of  a  very  perplexing  nature.  Our  people  will  more  and 
more  take  on  the  characteristics  of  an  indoor  people. 

Dependence  of  manufacturing  upon  transportation.  Another 
most  important  consequence  of  the  development  of  manufacturing 
as  our  dominant  industry  will  be  the  growing  importance  of  trans- 
portation. If  we  are  to'  turn  to  the  indoor  industries  and  depend 
upon  distant  regions  of  the  earth  for  the  products  of  the  outdoor 
industries,  obviously  we  must  find  cheap  and  efficient  methods  of 
sending  our  products  to  those  distant  regions  and  of  bringing  their 
products  back. 


THE  MANUFACTURING  INDUSTRIES  169 

EXERCISES 

1.  What  kind  of  a  picture  do  you  have  in  your  mind  when  you 
think  of  a  factory  ?  Is  this  the  only  kind  of  factory  ?  What  are  some 
of  the  other  kinds  ? 

2.  What  are  the  main  reasons  why  large  factories  have  tended  to 
displace  small  shops?  Do  these  reasons  apply  to  each  and  every 
kind  of  manufacturing? 

3.  Why  do  some  nations  develop  indoor  industries  more  rapidly  than 
others  ? 

4.  Why  does  more  and  more  work  tend  to  be  done  indoors  rather 
than  outdoors? 


CHAPTER  XIX 
TRANSPORTATION 

Moving  things  over  long  distances.  Since  all  industry  con- 
sists in  moving  materials  from  one  place  to  another,  it  follows  as 
a  matter  of  course  that  transportation  must  form  an  important  part 
of  the  industrial  system.  The  transportation  system  has  been 
likened  to  the  veins  and  arteries  of  the  human  body,  just  as  the 
telegraph  and  telephone  systems  have  been  likened  to  the  nerves. 

Interdependence  of  manufacturing  and  transportation.  The 
development  of  the  factory  system  as  described  in  the  preceding 
chapter,  and  of  large-scale  production  in  general,  would  have  been 
impossible  without  cheap  transportation. 

The  railway  and  the  factory  have  gone  hand  in  hand  in  their  develop- 
ment and  in  their  economic  results.  With  the  means  of  transportation 
which  existed  two  hundred  years  ago  large  industries  would  have  been 
impossible.  The  substitution  of  turnpikes  for  common  roads,  of  canals 
for  turnpikes,  and  of  railways  for  canals  was  as  essential  a  part  of 
industrial  progress  as  was  the  development  of  the  factory  system.^ 

Without  a  wide  market  on  which  to  sell  its  large  product  a  large 
factory  or  manufacturing  establishment  would  be  an  impossibility. 
In  the  days  of  restricted  local  markets,  when  each  little  com- 
munity was  almost  self-sufficing,  small  shops  having  individual 
handicraftsmen  could  supply  the  needs  of  each  such  market.  Not 
the  least  important  of  the  changes  which  have  come  about  since 
the  middle  of  the  eighteenth  century  have  been  the  removal  of  the 
barriers  which  divided  one  restricted  market  from  another  and 
the  creation  of  nation-wide  or  world-wide  markets,  instead  of  a 
series  of  local,  restricted  markets, 

^  President  A.  T.  Hadley,  Transportation,  in  Palgrave's  "  Dictionary  of 
Political  Economy." 

170 


TRANSPORTATION  171 

The  widening  of  the  market.  Cheap  transportation,  more 
than  anything  else,  has  made  possible  the  development  of  nation- 
wide and  world-wide  markets.  Raw  materials  sometimes  have 
to  be  brought  long  distances,  especially  in  a  case  where  several 
different  kinds  of  raw  material  enter  into  the  making  of  a  given 
product.  These  different  kinds  of  raw  material  are  not  always 
found  in  the  same  neighborhood.  The  iron  ore  of  the  Lake 
Superior  region  would  be  practically  useless,  because  of  its  distance 
from  the  coal  fields,  were  it  not  for  cheap  transportation  on  the 
Great  Lakes,  by  means  of  which  it  can  be  carried  almost  to 
the  mouths  of  the  coal  mines  of  Illinois,  Indiana,  Ohio,  and 
Pennsylvania. 

In  other  cases  the  raw  material  itself  is  produced  over  such 
wide  areas  as  to  make  centralized  and  large-scale  production  an 
impossibility  without  cheap  transportation.  The  slaughtering  of 
meat  animals  and  the  curing  and  packing  of  the  meat  is  a  case  in 
point.  These  animals  must  be  grown  on  the  farms  and  ranges  which 
cover  considerable  areas.  Without  cheap  transportation  they  would 
have  to  be  slaughtered  and  consumed  nearer  the  sources  of  produc- 
tion ;  with  cheap  transportation  they  may  be  sent  to  a  few  large 
packing  centers,  and  from  these  centers  the  meat  can  be  distributed 
over  practically  the  whole  country  and  over  considerable  portions 
of  the  civilized  world.  Without  cheap  transportation  every  large 
city  would  be  dependent  upon  the  supply  of  meat  that  could  be 
grown  within  driving  distance ;  that  is,  within  such  distances  as 
the  animals  could  travel  on  foot.  They  would  have  to  be  slaugh- 
tered near  each  center  of  consumption  in  order  that  the  meat 
might  be  distributed  economically. 

However  great  the  economies  of  large-scale  production  may  be, 
if  the  cost  of  transportation  were  as  great  as  it  once  was  the  small 
producer,  using  locally  produced  raw  materials  and  selling  on  a 
local  market,  would  save  so  much  on  the  cost  of  transportation  as 
to  give  him  an  advantage  over  the  largest  factory  located  a  long 
distance  away. 

Water  transportation  developed  first.  Historically,  water 
transportation  was  cheapened  long  before  we  had  cheap  land 


172  ELEMENTARY  ECONOMICS 

transportation.  Consequently  we  find  that  commerce  in  a  large 
sense  developed  first  on  the  water.  Great  cities  were  located  where 
there  were  advantages  in  water  transportation.  Some  considerable 
cities,  however,  developed  along  overland  routes.  Damascus  and 
Palmyra  in  western  Asia,  Troyes  and  Nuremberg  in  Europe,  may 
be  cited  as  examples.  But  most  of  the  great  cities  developed  along 
water  routes ;  Canton,  Hankow,  Calcutta,  Delhi,  Nineveh,  Baby- 
lon, Bagdad,  Tyre,  Constantinople,  Memphis,  Alexandria,  Venice, 
Genoa,  Antwerp,  and  London  may  be  cited  as  examples. 

Water  transportation  developed  first,  of  course,  where  it  was 
safe ;  that  is,  on  rivers  or  small  bodies  of  inclosed  water.  The 
great  rivers  were  the  first  great  routes  for  cheap  transportation. 
The  valleys  of  the  Nile,  the  Euphrates,  the  Tigris,  the  Ganges, 
and  the  Yangtze  developed  great  civilizations,  partly  because  they 
contained  good  soil  and  opportunities  for  irrigation  but  also  be- 
cause they  furnished  means  of  transportation. 

The  keel  and  the  compass.  The  next  stage  was  reached  when 
the  sailors  ventured  beyond  the  mouths  of  the  rivers  along  the 
adjacent  coasts  and  in  inclosed  seas  like  the  ^Egean,  the  Mediter- 
ranean, and  the  Baltic.  The  difficulty  of  navigation  in  those  days 
was  such  as  to  make  an  ocean  voyage  extremely  hazardous,  if  at 
all  possible.  The  boats  of  the  earliest  days  were  flat-bottomed — 
that  is,  they  had  no  keels ;  it  was  therefore  impossible  to  sail  in 
the  teeth  of  the  wind.  Sails  could  be  used  only  when  the  wind 
was  favorable ;  that  is,  when  it  blew  almost  in  the  direction  in 
which  the  sailors  wanted  to  go.  At  other  times  they  had  to  depend 
upon  large  numbers  of  oars  worked  by  human  muscles.  The  galley 
slave  was  a  part  of  that  system  of  transportation.  With  the  keel 
boat  and  the  mariner's  compass  the  use  of  sails  was  greatly 
enlarged,  and  sailors  could  venture  out  on  the  open  ocean. 

The  world  faces  the  ocean.  As  a  result  of  the  discoveries  of 
Columbus,  Vasco  da  Gama,  and  others,  the  world  is  said  to  have 
faced  about.  The  various  nations  had  formerly  faced  inward, 
with  their  backs  to  the  ocean ;  the  land  united  peoples,  but  the 
ocean  divided  them.  Since  that  time  they  have  tended  to  face 
outward — that  is,  to  face  the  ocean;  and  it  is  now  said  that  the 


TRANSPORTATION 


173 


land  divides,  but  the  ocean  unites.  While  distances  are  great  over 
these  ocean  routes,  the  building  of  larger  ships  propelled  either 
by  steam  or  by  wind  has  made  ocean  transportation  the  cheapest 
of  all  forms.  WTiere  time  is  not  a  factor  the  huge  sailing  vessels 
can  carry  freight  thousands  of  miles  at  a  lower  cost  than  it  can  be 
carried  hundreds  of  miles  even  on  our  best  railways.   Where  time 


THESE    CHINESE    PORTERS    CARRY    ENORMOUS    ..^..^d    „-.    iiACKS 
WHICH  ENABLE  THEM  TO  REST  WITHOUT  UNLOADING 


is  a  factor  the  ocean  cost  is  slightly  greater,  but  still  ocean  freight 
rates  are  amazingly  low.  The  question  of  economizing  power  and 
that  of  economizing  time  seem  sometimes  to  come  into  conflict. 
The  sailing  vessel  is  the  greatest  economizer  of  power,  but  it  is 
not  economical  of  time. 

Land  transportation.  The  most  primitive  trade  routes  were 
probably  paths  traversed  by  human  beings  carrying  their  own 
loads.    Beasts  of  burden  were,  however,  utilized  very  early  for 


174  ELEMENTARY  ECONOMICS 

this  purpose.  The  accounts  of  early  explorers  in  Central  Africa 
describe  the  great  forest  as  penetrated  by  a  network  of  paths  run- 
ning from  one  village  to  another,  so  that  a  traveler  could  cross  the 
continent  by  persistently  following  these  paths.  The  great  cara- 
van routes  across  the  desert  and  open  country  made  use  of  animals 
as  beasts  of  burden. 

Wheels.  A  wheeled  vehicle  is  a  great  advance  over  the  carrying 
of  loads  on  the  backs  either  of  men  or  of  animals.  In  some  of  the 
backward  districts  of  China  porters  still  carry  huge  loads,  and  it 
is  amazing  what  loads  a  man  can  carry  who  has  been  trained  to  it 
all  his  life.  B^ut  where  the  road  is  made  suitable  for  wheeled  ve- 
hicles the  porter  can  haul  about  three  times  as  much  on  wheels  as 
he  can  carry.  On  a  paved  street  or  a  macadamized  road  in  this 
country  a  pair  of  good  horses  will  haul  from  two  to  four  tons, 
whereas  about  six  hundred  pounds  is  a  load  for  one  pack  horse. 
"Even  on  the  common  dirt  roads  of  the  country,  when  they  are 
reasonably  well  kept  and  not  muddy,  a  pair  of  horses  will  haul 
from  a  ton  and  a  half  to  two  tons. 

Tracks.  It  is  interesting  to  note  how  every  advance  in  methods 
of  transportation  seems  to  depend  upon  the  quality  of  the  road  or 
track.  Wheeled  vehicles  could  be  substituted  for  packsaddles 
only  when  there  were  roads  suitable  for  wheeled  vehicles.  Well- 
kept  roads  and  paved  streets  are  necessary  before  mechanical 
power  can  be  substituted  for  animal  power  in  ordinary  hauling. 
The  acme  of  track  building  is  the  railway,  where  the  wheeled 
vehicle  runs  on  steel  rails.  The  friction  and  loss  of  power  between 
the  wheel  and  the  track  is  reduced  to  the  minimum.  In  a  similar 
way  the  modern  locomotive  is  the  climax  of  the  development  of 
mechanical  power.  The  powerful  engines  of  today,  however,  could 
scarcely  run  on  the  old-fashioned  railway  track,  with  its  light  iron 
rails.  Improvement  in  the  manufacture  of  the  steel  rail  has  had  to 
go  hand  in  hand  with  the  improvement  of  the  locomotive  engine. 

Railways.  In  no  country  has  the  development  of  the  railway 
quite  kept  pace  with  its  development  in  the  United  States,  though 
in  proportion  to  their  need  for  railway  transportation  England  and 
France  have  kept  close  behind  us.    In  addition  we  have  had  an 


176  ELEMENTARY  ECONOMICS 

abundance  of  material  for  railway  construction.  Moreover,  our 
people  have  shown  a  great  deal  of  initiative  and  enterprise  in  push- 
ing the  business.  In  some  countries  this  spirit  of  enterprise  has 
been  so  lacking  that  the  governments  themselves  have  had  to  take 
hold  of  the  matter  and  build  the  roads  at  government  expense. 

Public  or  private  railways.  The  problem  of  railway  manage- 
ment, however,  has  been  a  very  difficult  pne  in  every  country.  In 
one  sense  the  railway  system  would  seem  to  belong  to  the  general 
system  of  streets,  roads,  and  highways.  The  general  experience 
of  mankind  has  shown  that  streets,  roads,  and  highways  should 
be  public  rather  than  private.  This  has  led  to  the  assumption 
that  railways  should  be  treated  similarly.  There  is,  however,  this 
important  difference.  On  the  streets,  roads,  and  highways  private 
individuals  use  their  own  vehicles,  travel  freely,  and  go  and  come 
when  they  please.  The  actual  work  of  transportation,  therefore, 
is  not  carried  on  by  the  public.  This  method  would  be  impossible 
on  a  railway.  The  trains  must  run  on  schedule  time  and  under  a 
well-administered  system ;  otherwise  there  would  be  nothing  but 
confusion  and  inefficiency  and  multitudinous  wrecks.  If  the  public 
undertakes  to  own  the  railways  it  would  have  to  go  much  farther 
than  it  does  when  it  owns  the  streets  and  highways.  It  would  either 
have  to  operate  all  the  vehicles  (that  is,  trains)  or  lease  the  road  to 
a  single  company  which  would  have  the  exclusive  use  of  the  tracks. 

There  are  therefore  two  analogies  which  may  be  drawn  between 
the  highway  system  and  the  railway  system.  Since  the  government 
owns  the  highways,  one  group  of  people,  reasoning  by  analogy,  say 
that  the  government  ought  to  own  the  railways.  On  the  other 
hand,  it  is  asserted  that  since  private  individuals  operate  the 
vehicles  that  are  used  on  the  highways,  and  the  government  is  not 
in  the  transportation  business  at  all,  a  similar  rule  should  prevail 
with  respect  to  railway  transportation ;  private  individuals  or 
companies  should  do  the  hauling  and  therefore  own  the  railway. 
In  this  country  we  have  followed  the  latter  principle,  but  it  has 
made  necessary  a  considerable  regulation  of  the  companies  which 
do  the  hauling.  A  third  possibility  is  for  the  government  to  build 
and  own  the  tracks  and  then  lease  them  to  operating  companies. 


178  ELEMENTARY  ECONOMICS 

Monopolistic  character  of  a  railway.  From  the  very  nature 
of  the  case  a  railway  must  be  operated  as  a  monopoly  or  quasi 
monopoly.  It  would  be  impossible  for  even  two  companies  to  run 
trains  on  the  same  track  or  over  the  same  railway  system  unless 
one  became  absolutely  subject  to  the  administrative  rules  of  the 
other.  This  quasi-monopolistic  character  of  the  railway  has  given 
the  management  more  control  over  rates  than  individual  draymen, 
freighters,  cabmen,  etc.  can  exercise  over  freight  and  passenger 
rates  in  the  vehicles  that  are  operated  on  public  highways.  In 
order  to  hold  in  check  this  quasi-monopolistic  power  of  the  rail- 
way, a  great  deal  of  legislation  has  been  enacted  in  this  country. 

Short-distance  and  long-distance  hauling.  In  several  coun- 
tries, such  as  Germany,  Switzerland,  Australia,  and  others,  the  op- 
posite alternative  has  been  chosen.  The  government  has  built  and 
continues  to  operate  the  railways.  In  Germany  railroad  building 
was  primarily  a  military  enterprise.  In  order  that  she  might  build 
up  her  military  power  and  be  able  to  concentrate  vast  armies  and 
supply  them  at  any  point,  she  needed  a  well-articulated  railway 
system.  In  this  respect  her  policy  resembled  that  of  the  Romans, 
who  were  great  road  builders  in  their  day.  Their  system  of  roads 
enabled  them  to  march  their  armies  rapidly  from  one  part  of  the 
Empire  to  another,  to  concentrate  wherever  concentration  was 
needed,  and  thus  to  outmaneuver  their  enemies. 

As  to  the  effects  of  the  two  systems  on  peaceful  commerce,  there 
are  many  different  opinions.  No  railway  system  in  the  world 
compares  with  that  of  the  United  States  in  the  cheapness  and 
swiftness  of  long-distance  freight.  Our  railways,  however,  have 
given  comparatively  little  attention  to  local  freight.  In  the  ef- 
ficiency and  cheapness  with  which  local  freight  is  handled  they 
are  far  behind  the  railroads  not  only  of  Germany,  where  the 
government  owns  and  operates  the  roads,  but  also  of  England, 
where  they  are  operated  by  private  companies. 

The  difference  is  probably  not  to  be  accounted  for  on  the  ground 
of  public  or  private  ownership.  In  a  densely  populated  country, 
where  the  distances  are  never  very  great,  it  would  be  quite  natural 
that  short-distance,  or  local,  freight  should  form  a  large  part  of  the 


)  Underwood  &  Underwood,  N.Y. 

TRANSPORTATION  UNDER  IDEAL   CONDITIONS,   WHERE  SPEED, 
SAFETY,   AND  PLEASURE  ARE   COMBINED 


i8o  ELEMENTARY  ECONOMICS 

business  of  the  railroad  ;  whereas  in  a  country  of  such  vast  ex- 
panse as  ours  it  would  be  equally  natural  that  long-distance  freight 
should  form  the  chief  part  of  the  railroad  business.  Each  railway 
system  therefore  tends  to  specialize  in  that  field  where  its  chief 
business  lies. 

Arguments  against  both  sides.  No  final  conclusion  is  possible 
as  to  the  relative  merits  of  public  and  private  management.  As  Sir 
Roger  de  Coverley  was  in  the  habit  of  saying,  "  Much  might  be 
said  on  both  sides."  The  arguments  against  private  ownership 
and  operation  are  based  mainly  on  the  monopolistic  character  of 
the  railroad  business,  the  rapacity  of  railroad  managers,  and  the 
general  distrust  of  "  big  business."  The  arguments  against  public 
ownership  and  operation  are  based  mainly  upon  the  inefficiency  of 
public  business,  the  danger  that  politics  rather  than  business  needs 
will  determine  rates  and  other  details  of  the  business,  and  the 
general  distrust  of  the  politician. 

These  considerations  might  very  properly  convince  one  that 
the  same  system  is  not  necessarily  the  best  for  all  countries.  In  a 
country  which  is  dominated  by  autocratic  and  military  standards, 
where  business  is  contemptuously  spoken  of  as  "  shopkeeping," 
where  government  service  attracts  a  better  class  of  men  than  busi- 
ness attracts,  and  where  men  are  chosen  for  high  positions  not 
because  of  their  talkativeness  or  popularity  but  because  of  their 
knowledge  and  efficiency,  the  objections  to  public  ownership  and 
operation  are  weak  and  those  against  private  ownership  and  oper- 
ation are  strong.  In  a  country,  however,  which  is  dominated  by 
democratic  ideals,  where  business  and  all  honest  occupations  have 
always  been  regarded  as  just  as  honorable  as  government  or  mili- 
tary service,  where,  on  the  whole,  business  attracts  a  better  class 
of  men  than  politics,  and  where  men  are  chosen  for  high  public 
positions  mainly  on  the  ground  of  their  ability  to  make  stump 
speeches  rather  than  on  the  ground  of  their  knowledge  and  effi- 
ciency, the  objections  to  government  ownership  and  operation  are 
very  strong  and  those  against  private  ownership  and  operation 
are  relatively  weak. 


TRANSPORTATION  i8i 


EXERCISES 


1.  In  what  sense  does  transportation  differ  from  other  work,  since 
all  work  consists  in  moving  materials  ? 

2.  Would  our  modern  system  of  manufacturing  have  been  possible 
without  improved  means  of  transportation  ?     Why  not  ? 

3.  What  effect  has  cheap  transportation  had  on  the  size  of  markets  ? 

4.  What  kind  of  transportation  developed  first? 

5.  What  were  some  of  the  early  inventions  that  helped  to  improve 
transportation  ? 

6.  What  kinds  of  transportation  are  now  cheapest  ? 

7.  What  are  some  of  the  reasons  in  favor  of  public  ownership  of 
the  railroads  ? 

8.  What  are  some  of  the  reasons  in  favor  of  private  ownership  ? 

9.  Is  there  any  final  answer  that  applies  to  all  countries  and  all 
times  ? 


CHAPTER  XX 
MERCHANDISING  AND  THE  PROFESSIONS 

Personal  utility.  In  a  previous  chapter  it  was  pointed  out  that 
three  kinds  of  utility  are  produced  by  human  industry, — form 
utility,  place_utility,jand-time  utility.  It  would  be  possible,  if  one 
cared  ^fo'draw  somewhat  finer  distinctions,  to  speak  of  personal 
utility  as  a  fourth  kind.  When  an  object  is  transferred  from  a  per- 
son who  has  little  use  for  it  to  a  person  who  has  a  greater  use  for  it, 
its  utility,  or  power  to  satisfy  desires,  is  increased  by  the  transfer, 
just  as  truly  as  though  it  were  transferred  from  a  locality  where 
it  was  not  needed  to  a  locality  where  it  was  needed. 

There  is  an  ancient  fallacy  to  the  effect  that  someone  must  gain 
and  someone  must  lose  in  every  trade.  'Two  farmers  may  trade 
horses  and  both  gain.  A  potato  grower  who  has  a  surplus  of 
potatoes  and  a  shoemaker  who  has  a  surplus  of  shoes  may  ex- 
change products  to  the  advantage  of  both. 

Merchandising  may  be  productive  of  utility.  If  it  is  agreed 
that  the  power  of  goods  to  satisfy  wants  is  increased  when  those 
goods  get  into  the  possession  of  the  people  who  really  need  them, 
it  ought  not  to  be  difficult  to  see  that  the  individual  who  helps  on 
this  process  is  a  productive  individual.  Even  if  we  leave  trans- 
portation and  the  storing  of  goods  out  of  account  and  merely  con- 
sider the  transfer  of  goods  from  one  person  to  another  in  the  same 
locality,  we  shall  find  that  unless  there  were  merchants  or  mer- 
cantile houses  the  various  producers  would  find  difficulty  in  mak- 
ing the  necessary  exchanges.  The  farmer  with  a  surplus  of  wheat 
might  have  some  difficulty  in  finding  a  shoemaker  who  wanted 
wheat  and  was  willing  to  exchange  shoes  for  wheat.  Under  a 
highly  developed  mercantile  system  a  farmer  can  always  find  buy- 
ers for  his  wheat.  He  can  also  find  a  shoe  store  where  he  can  buy 
shoes,  a  clothing  store  where  he  can  buy  clothing,  and  so  on. 

182 


MERCHANDISING  AND  THE  PROFESSIONS      183 

These  men  who  specialize  in  trading  are  sometimes  called 
middlemeri^  and  it  is  not  difficult  to  see  that  they  are  not  only 
exceedingly  useful  but  in  some  cases  absolutely  necessary.  An 
immense  amount  of  time  and  trouble  are  saved  when  every  pro- 
ducer can  sell  directly  to  a  middleman  and  go  on  about  his  work 
of  production,  while  at  the  same  time  every  consumer  can  purchase 
exactly  what  he  wants  from  some  merchant. 

The  middleman  as  a  timesaver.  Generally  speaking,  it  will  be 
observed  that  in  any  community  where  the  average  person  con- 
siders his  time  to  be  valuable,  there  are  a  great  many  middlemen 
intervening  between  producers  and  consumers,  and  very  little 
direct  marketing.  In  a  community,  however,  where  wages  and 
incomes  are  low  and  the  average  person  finds  his  time  of  very 
little  value,  there  is  a  great  deal  of  direct  bartering  between 
producer  and  consumer.  The  open  market  place,  where  producers 
and  consumers  meet,  flourishes  in  communities  of  the  latter  type 
but  not  in  communities  of  the  former  type. 

"Time  is  money."  There  is  an  old  adage  that  time  is  money. 
Where  time  is  valuable  it  is  economized ;  where  it  is  of  little 
value  it  is  not  economized.  Where  the  average  housekeeper  con- 
siders her  time  valuable  she  does  not  care  to  spend  much  time 
marketing  and  dickering  with  producers  who  bring  their  stuff  to 
market.  She  prefers  to  market  by  telephone.  This  is  a  great 
saving  of  time,  but  it  is  generally  expensive  in  terms  of  money. 
The  problem  in  economy  which  every  producer  and  every  con- 
sumer must  decide  for  himself  is  whether  his  time  is  worth  as 
much  as  the  money  which  he  might  otherwise  save.  It  is  the 
belief,  however,  of  many  students  of  the  problem  that  the  Amer- 
icans have  gone  too  far  in  the  direction  of  saving  time, — so  far,  in 
fact,  as  to  waste  more  money  than  necessary  in  middlemen's  costs 
and  profits. 

Marketing  sometimes  a  social  function.  Another  factor  en- 
ters into  the  success  of  public  markets,  where  producer  and  con- 
sumer meet.  In  those  countries  where  the  system  still  prevails, 
going  to  market  has  become  a  social  function.  The  market  place 
is  the  place  where  citizens  meet  and  where  the  women  make  their 


1 84  ELEMENTARY  ECONOMICS 

social  calls  and  pay  their  social  obligations.  This  phase  of  the 
question  has  played  a  very  important  part  in  history.  The  Roman 
Forum,  for  example,  was  simply  the  market  place,  in  which  the 
farmers  from  the  surrounding  country  and  the  people  of  the  city 
of  Rome  met,  primarily  for  purposes  of  exchange  and  secondarily 
for  purposes  of  social  intercourse  and  political  discussion.  The 
latter  functions  gradually  displaced  the  former,  and  the  Roman 
Forum  gradually  became  the  center  of  Roman  politics  and  eventu- 
ally the  center  of  the  world. 

Buying  large  quantities  and  selling  in  small  parcels.  Another 
very  important  function  performed  by  the  mercantile  house  is  that 
of  receiving  products  in  large  quantities  and  dividing  them  into 
small  parcels  for  the  consumer.  This  meets  the  convenience  of 
both  producer  and  consumer.  The  convenience  of  the  producer  is 
met  by  his  ability  to  sell  in  bulk;  the  convenience  of  the  con- 
sumer is  met  by  his  ability  to  buy  in  small  parcels. 

Storing  goods.  One  of  the  most  important  functions  of  the 
mercantile  class,  however,  is  that  of  storing  goods.  In  fact,  it  is 
still  customary  to  speak  of  certain  mercantile  houses  as  stores. 
The  storing  of  goods  produees^- time  utility.  They  are  kept 
from  a  time  when  they  are  not  especially  needed  until  a  time 
when  they  are.  Their  utility  is  thus  increased.  This  function  of 
storing  goods  is  particularly  important  in  the  case  of  goods  which 
are  produced  by  a  seasonal  industry,  such  as  agriculture.  The 
wheat  is  harvested  during  one  period  of  the  year,  but  needs  to 
be  consumed  during  the  entire  year.  Unless  someone  were  ready  to 
store  this  product,  it  would  have  to  be  used  very  inefficiently  at  one 
period  of  the  year,  and  there  would  be  a  scarcity  at  another  period. 

Utility  of  storing  without  monopolizing.  Contrary  to  a  cer- 
tain popular  belief,  the  effect  of  storing  vast  quantities  of  farm 
products  in  warehouses  is  beneficial  rather  than  otherwise.  No 
speculator  or  warehouse  owner  would  have  any  motive  for  storing 
products  except  that  of  getting  a  higher  price  later.  He  could 
not  get  this  higher  price  unless  the  goods  grew  scarcer.  If  they 
grow  scarcer  later,  it  is  very  much  to  the  interest  of  society  that 
they  be  stored  rather  than  consumed  at  once. 


MERCHANDISING  AND  THE  PROFESSIONS      185 

At  a  time  when  prices  are  very  high  anyway  and  it  is  found 
that  a  great  deal  of  grain  is  being  stored  up  there  naturally  de- 
velops a  certain  popular  dissatisfaction.  Being  shortsighted,  we 
do  not  appreciate  what  is  likely  to  be  our  situation  several  months 
hence.  The  only  thing  we  see  is  that  prices  are  now  distressingly 
high.  We  see  this  in  connection  with  another  fact,  namely,  that 
large  quantities  of  grain  are  being  stored.  We  think,  naturally 
enough,  that  if  that  grain  were  taken  out  of  storage  and  sold  at 
once,  prices  would  not  be  so  high  at  the  present  moment.  If,  how- 
ever, we  were  a  little  more  farsighted  we  should  look  ahead  and 
consider  what  the  situation  would  be  later.  If  grain  is  to  be  more 
abundant  then  than  now,  the  price  will  fall.  If  that  were  the 
expectation  nobody  would  be  willing  to  store  a  single  bushel  of 
grain  until  that  time.  Everybody  who  had  wheat  would  want  to 
sell  it  as  soon  as  possible. 

If  those  who  are  in  a  position  to  judge  believe  that  wheat  will 
be  scarcer  in  December  than  in  September,  and  the  price  therefore 
higher,  they  find  it  to  their  interest  to  store  it  up.  If  they  are 
correct  in  their  anticipation  it  is  very  important  for  society  at 
large  that  they,  or  somebody,  should  store  up  wheat ;  otherwise 
we  should  consume_wast£fiillx  in  the  autumn  and  go  hungry  in  the 
winter.  Tt  ought  not  to  take  very  much  forethought  or  reasoning 
power  to  understand  this.  It  is,  however,  a  sad  commentary  on 
the  shortsightedness  of  many  of  our  people  that  this  is  so  im- 
perfectly understood  and  that  we  are  so  often  resentful  toward 
those  who  are  performing  this  important  function  of  storing. 

Another  fact  which  should  be  taken  into  consideration  is  that 
formerly  large  numbers  of  people,  both  producers  and  consumers, 
did  their  own  storing,  whereas  at  the  present  time  that  work  is 
turned  over  to  a  special  group  of  men  who  own  elevators,  cold- 
storage  warehouses,  and  other  storage  facilities.  WTiile  both  pro- 
ducer and  consumer  are  turning  this  work  over  to  a  special  class, 
they  must  not  forget  that  the  only  motive  which  this  special  class 
has  for  doing  this  special  work  is  the  hope  of  a  profit.  If  they 
can  give  the  service  cheaper  than  producers  and  consumers  can 
furnish  it  for  themselves,  they  have  earned  a  profit. 


i86  ELEMENTARY  ECONOMICS 

Cornering,  or  monopolizing  is  destructive  of  utility.  We 
should  be  careful,  however,  to  distinguish  between  storing  for 
sale  on  a  competitive  market  and  monopolizing  ler  sale  ob^^S^ 
~is~Enown^as-a-corhe^€d^mSrEet.  If  there  were  collusion  among  all 
those  who  own  warehouses  or  who  are  in  a  position  to  store 
products, — an  agreement  to  control  the  supply  and  fix  prices 
arbitrarily, — there  would  be  a  real  grievance.  But  if  we  can 
once  satisfy  ourselves  that  there  is  no  collusion  or  attempt  at 
monopolization,  that  the  products  are  being  stored  for  sale  on 
a  competitive  market,  we  can  rest  perfectly  easy  in  our  minds, 
because  no  one  could  make  any  money  by  storing  in  this  way 
unless  it  were  genuine  social  service  to  do  so.  By  social  serv- 
ice, of  course,  we  do  not  mean  philanthropic  service,  but  merely 
useful  work. 

Standardization.  Another  very  important  function  performed 
by  the  mercantile  class  is  what  is  known  as  the  classification  or 
standardization  of  goods.  The  producer  of  farm  products  cannot 
produce  goods  of  uniform  kind  and  quality.  On  every  apple  tree 
there  will  be  apples  of  various  grades  and  in  every  large  orchard 
likewise.  In  every  poultry  yard  there  will  be  fowls  of  different 
qualities.  The  consumer  who  tried  to  purchase  directly  from  the 
farm  might  not  find  exactly  the  grade  or  quality  which  he  desired. 
When  the  farmer  sells  his  products  in  bulk  the  middleman  wij] 
frequently  classify  or  grade  them  into  a  large  number  of  grades. 
Each  hotel  and  restaurant  and  every  private  consumer  can  get 
from  such  a  dealer  exactly  what  he  wants.  ^Multitudes  of  other 
illustrations  could  be  given,  but  enough  has  been  said  to  show  that 
merchandising  is  a  very  important  factor  in  the  economy  of 
human  energy  and  the  promotion  of  national  prosperity. 

Deception  always  destruction.  It  is  quite  probable,  however, 
that  certain  practices  will  grow  up  in  connection  with  merchandis- 
ing which  are  injurious.  There  is  probably  no  other  branch  of 
human  industry  or  business  which  lends  itself  so  easily  t^jiecfp- 
tion  and  adulteration  and  furnishes  such  temptations— to— hi^- 
pressure  advertising  and  salesmanship.  The  arts  of  persuasion  are 
developed  to  a  high  degree  of  proficiency  and  easily  develop  into 


MERCHANDISING  AND  THE  PROFESSIONS      187 

the  arts  of  deception.  It  is  not  necessary  to  present  any  arguments 
to  show  that  deceptioiLContributes  nothing  to  national  prosperity. 

Advertising.  Advertising  occupies  a  promrnenT^place^amohg 
the  forms  in  which  the  art  of  persuasion  is  carried  to  a  high  state 
of  development  in  modern  times.  To  what  extent  advertising  is 
economically  justified  has  been  a  difficult  question  and  must  re- 
main so.  Advertising  is  sometimes  educational.  The  individual 
sometimes  learns  from^dyertisements  where  he  can  get  something 
which  he  really  wants  and  has  wanted  ior  a  long  time.  This 
applies,  however,  mainly  to  new  products  that  have  recently  been 
put  upon  the  market.  One  scarcely  needs  an  advertisement  to 
tell  one  of  the  existence  of  soap  or  codfish  or  to  acquaint  one  with 
the  fact  that  such  things  are  to  be  purchased  at  stores.  In  many 
cases  of  thisjkind  the  only  effect  of  advertising  is  to  persuade  the 
consumer  to  use  one  man's  product  rather  than  another's,  and  no 
addition  whatever  is  made  to  the  national  wealth  or  to  the  well- 
being  of  society. 

Causing  productivity  in  others.  Falstaff  said,  "I  am  not  only 
witty  in  myself,  but  the  cause  that  wit  is  in  other  men."  There 
are  many  men  and  women  in  every  community  who  are  not  di- 
rectly producing  wealth  but  who  are  the  cause  of  productivity  in 
others.  The  teacher  who  trains  students  in  the  productive  arts  is, 
to  say  the  least,  a  cause  of  productivity  and  becomes  a  contributor 
to  national  prosperity.  The  singer,  the  poet,  and  the  artist  who 
inspire  to  strenuous  action  and  noble  deeds  likewise  contribute 
their  share  to  the  greatness  of  the  nation.  The  military  band  is 
a  part  of  the  fighting  strength  of  the  army,  even  though  its  mem- 
bers never  handle  a  destructive  weapon  of  any  kind. 

The  social  function  of  art,  religion,  etc.  A  great  French  artist, 
when  he  found  his  country  in  the  throes  of  the  life-and-death 
struggle  which  began  with  the  invasion  of  19 14,  speaking  before 
a  gathering  of  French  artists,  said  that  in  that  crisis  no  art  would 
be  tolerated  ''which  was  not  noble,  robust,  proud,  and  an  inciter 
of  high  thoughts  and  delicate  sentiments — an  art  of  heroic  joy." 
Facing  the  future,  he  continued :  ''  You  would  not  tolerate  any- 
thing less  today.   Then  why  should  you  tolerate  anything  less 


1 88  ELEMENTARY  ECONOMICS 

hereafter,  in  that  tomorrow  when  our  duties  shall  be  changed?" 
Here  was  a  full  acceptance  of  the  view  that  art  has  an  end  beyond 
itself  and  is  not  its  own  excuse  for  being. 

Government.  The  officers  of  the  government  who  preserve  order 
and  protect  lives  and  property  contribute  a  large  share  to  national 
prosperity.  An  army,  whose  business  may  seem  to  be  destruction 
rather  than  production,  by  protecting  against  invasion  from  with- 
out and  insurrection  and  disorder  from  within,  may  be  an  indis- 
pensable factor  in  prosperity. 

It  is  of  course  possible  to  have  too  many  so-called  nonproducers, 
not  only  in  the  army  but  in  public  offices  of  different  kinds,  as 
well  as  in  the  various  talking  and  ornamental  professions.  The 
work  of  the  soldier,  for  example,  is  one  of  the  most  honorable  of 
all  professions  so  long  as  national  defense  is  necessary ;  but  even 
the  professional  soldier  himself  will  generally  agree  that  it  would 
be  an  excellent  thing  if  war  could  be  eliminated  and  the  work  of 
the  soldier  made  unnecessary.  The  same  reasoning  may  be  applied 
to  many  other  occupations. 

Wherein  labor  contributes  to  national  prosperity  and  wherein 
it  does  not.  There  is  a  very  important  distinction  between  labor 
which  contributes  to  the  well-being,  prosperity,  and  greatness 
of  the  nation  and  that  which  does  not.  Labor  may  produce  a 
commodity  which  sells  for  a  high  price  on  the  market, — which 
satisfies  an  intense  desire  which  people  will  pay  a  high  price  to 
have  gratified ;  and  yet  if  the  desire  is  a  vicious  one,  if  its  grati- 
fication weakens  in  mind  or  body  those  who  buy  it,  or  if  it  merely 
incapacitates  them  temporarily  for  useful  work,  that  labor  would 
have  to  be  classed  as  unproductive.  On  the  other  hand,  the  labor 
of  the  musician,  the  poet,  or  the  preacher,  if  it  does  not  tend  to 
produce  softness  but  inspires  to  strenuosity  and  productivity,  if 
it  rationalizes  the  consumption  of  wealth,  if  it  makes  people  desire 
the  right  things,  would  have  to  be  classified  as  highly  productive. 

Professional  and  personal  service.  All  labor  which  is  not  en- 
gaged in  the  production  or  handling  of  material  commodities 
which  are  bought  and  sold  on  the  market  is  grouped  in  various 
census  reports  and  other  public  documents  as  professional  and 


MERCHANDISING  AND  THE  PROFESSIONS      189 

personal  service.  Professional  service  is  limited  to  a  few  learned 
or  highly  skilled  occupations  such  as  law,  medicine,  theology, 
teaching,  governing,  acting,  etc.  Personal  service  includes  such 
a  multitude  of  occupations  as  would  fill  a  small  catalogue.  Bar- 
bers, bootblacks,  valets,  domestic  servants,  and  all  others  who 
render  their  service  directly  rather  than  indirectly  through  the 
medium  of  a  material  product,  may  be  said  to  render  personal 
service.  If  it  is  genuine  service,  whether  it  is  professional  or  per- 
sonal, it  is  a  factor  in  the  prosperity,  power,  and  greatness  of 
the  nation^__.-^ 

^^  EXERCISES 

1.  What  is  meant  by  personal  utility  and  how  is  it  increased? 

2.  Can  both  parties  to  a  trade  gain  ? 

3.  In  what  sense  can  merchandising  be  called  productive  work  ? 

4.  Which  do  you  consider  more  important,  to  save  time  or  to  save 
money  ?    Why  ? 

5.  Under  what  conditions  do  public  markets  flourish? 

6.  Is  storing  goods  a  useful  thing  to  do?     Why? 

7.  How  about  monopolizing  or  cornering? 

8.  What  is  meant  by  standardizing  goods? 

9.  In  what  cases  is  advertising  useful  work? 

10.  In  what  senses  are  artists,  government  ofi&cials,  etc.  productive 
workers  ? 

11.  Is  all  labor  productive? 


PART  FOUR.    EXCHANGE 


CHAPTER  XXI 
VALUE:    ITS  MEANING 

Exchange  an  important  economic  activity.  Buying  and  sell- 
ing, or  exchanging  commodities  and  services,  is  one  of  the  chief 
activities  in  all  civilized  countries.  The  reasons  for  this  are  very 
simple.  If  you  want  a  thing  you  have  only  three  choices :  you 
may  find  or  produce  it  yourself,  you  may  get  it  from  someone 
else,  or  you  may  do  without  it.  If  someone  else  happens  to  have  it 
you  may  find  it  easier  to  get  it  from  him  than  to  produce  another 
thing  like  it.  But  if  there  is  enough  of  a  government  to  prevent 
you  from  using  violence  or  fraud,  your  only  chance  of  getting 
it  from  him  is  to  make  him  willing  to  let  you  have  it  peacefully. 
One  of  the  best  ways  of  doing  this  is  to  offer  him  something  which 
he  would  like  to  have  in  exchange  for  it. 

Voluntary  agreement  among  free  men.  Among  all  progres- 
sive peoples  this  method  has  been  so  largely  followed  as  to  make 
the  exchange  of  goods  and  services  one  of  the  most  important  parts 
of  the  national  economy.  All  progressive  governments  have  been 
trying  more  and  more  to  create  conditions  under  which  no  person 
is  permitted  to  use  force  or  fraud  against  any  other  person.  In 
proportion  as  this  is  accomplished  men  are  led  to  get  along  to- 
gether by  voluntary  agreement.  The  system  of  voluntary  agree- 
ment as  a  means  of  getting  things  done  has  more  and  more 
displaced  authority,  force,  or  deception.  Wherever  the  system  of 
voluntary  agreement  among  free  citizens  prevails,  it  is  as  certain 
as  anything  can  be  that  there  will  be  a  great  deal  of  exchanging. 
The  reason  for  this  is  that  it  is  more  economical  of  time  and  energy 
to  specialize,  each  one  producing  what  he  can  produce  most  suc- 
cessfully and  exchanging  his  products  or  his  services  with  others. 

There  are  thus  seen  to  be  two  reasons  for  the  general  system  of 
free  exchange :  first,  the  government  must,  by  the  suppression  of 

193 


194  ELEMENTARY  ECONOMICS 

violence  and  fraud,  have  created  the  system  of  voluntary  agreement 
as  the  basis  of  all  organized  action  among  free  men ;  second,  there 
must  be  a  perception  of  the  superior  economy  of  specialization. 

They  who  live  in  free  countries,  under  liberal  governments,  are 
likely  to  take  the  system  of  voluntary  agreement  for  granted,  much 
as  they  take  air,  sunlight,  the  sky  above,  and  the  earth  beneath 
for  granted.  Few  realize  that  it  took  many  thousands  of  years  of 
painful  progress  to  reach  even  our  present  stage.  Not  realizing 
what  it  has  cost  nor  how  precious  it  really  is,  thoughtless  persons 
sometimes  hold  it  in  light  esteem,  as  they  do  air  and  sunlight. 

Exchange  a  part  of  the  division  of  labor.  The  economic  ad- 
vantages of  exchange  will  be  clearly  understood  if  we  recall  what 
was  said  in  the  chapter  on  the  Division  of  Labor  about  the  ad- 
vantages of  specialization.  When  the  whole  industrial  society  is 
so  organized  that  each  person  can  do  that  for  which  he  is  best 
fitted  by  nature,  training,  inclination,  and  location,  the  general 
quality  of  the  work  is  better  than  it  would  be  if  everyone  had 
to  learn  a  great  many  things.  It  was  also  pointed  out  that  the 
division  of  labor  necessitates  the  exchange  of  products  and  services. 
Therefore  exchange  has  come  to  be  one  of  the  most  important  de- 
partments of  the  subject  of  political  economy.  Our  whole  system 
of  trading,  transporting,  and  merchandising  is  a  necessary  part  of 
an  industrial  system  which  is  characterized  by  the  division  and 
specialization  of  labor. 

Valuation  a  part  of  exchange.  An  important  part  of  this 
intricate  system  of  exchange  is  the  process  of  valuation  of  goods 
and  services.  It  would  be  difficult  to  do  very  much  exchanging 
without  beginning  to  think  in  terms  of  value.  In  fact,  even  in 
the  simplest  case  of  barter,  as  when  boys  swap  marbles,  each 
barterer  compares  in  his  mind  the  desirability  of  the  objects  that 
are  to  be  exchanged. 

To  value  is  to  esteem.  To  compare  the  desirability  of  the 
objects  is  to  think  in  terms  of  value.  In  its  original  and  individual 
sense  the  value  of  a  thing  was  the  esteem  in  which  it  was  held ; 
in  a  somewhat  more  highly  developed,  or  social,  sense  the  value 
of  a  thing  is  the  esteem  in  which  it  is  held  by  all  those  who  are 


VALUE:  ITS  MEANING  195 

interested  in  it.  When  men  in  considerable  numbers  are  evaluating 
and  comparing  the  same  group  of  commodities,  a  market  is  said 
to  exist.  Where  a  market  exists  for  an  object,  its  value  is  the 
esteem  shown  for  it  on  the  market.  The  sign,  or  symptom,  of 
that  esteem  is  the  fact  that  men  are  making  sacrifices  in  order  to 
get  the  object ;  that  is,  they  are  either  laboring  to  get  it  or  they 
are  giving  up  other  desirable  things  in  exchange  for  it. 

Value  in  exchange.  This  willingness  to  give  something — 
either  labor  or  another  desirable  object — in  exchange  for  a  thing 
has  finally  come  to  be  regarded  by  most  writers  as  the  value  of  the 
thing,  instead  of  being,  as  originally,  regarded  merely  as  the  sign,  or 
symptom,  of  the  esteem  in  which  it  was  held.  A  brief  but  satis- 
factory definition  of  market  value,  or  of  value  as  it  is  understood 
on  the  market  and  in  commercial  circles,  is  "power  in  exchange." 
Under  this  definition  the  value  of  an  article  is  the  power  which  it 
confers  upon  its  owner  to  command  other  desirable  things  in  peace- 
ful and  voluntary  exchange.  There  has  come,  therefore,  a  change 
in  the  popular  meaning  of  the  word  "value."  In  modern  usage 
the  esteem  in  which  the  object  is  held,  or  the  desire  which  is  felt 
for  it,  is  that  which  gives  it  value  instead  of  being  the  value  itself. 

Need  of  something  to  give  in  exchange.  The  purchasing 
power,  or  value  in  exchange,  of  an  object  is  not  always  propor- 
tional to  the  esteem  which  is  felt  for  it  or  the  intensity  of  the 
desire  for  it.  Among  wanderers  on  ^a  desert  a  small  portion  of 
water  would  be  exceedingly  precious  ;  but  if  none  of  them  had 
anything  to  give  in  exchange  for  it,  it  would  not  have  much  pur- 
chasing power.  It  would  not  have  much  market  value ;  that  is, 
its  owner  would  not  realize  very  much  from  its  sale.  It  would, 
however,  be  held  in  the  very  highest  esteem  ;  it  would  be  intensely 
desired ;  it  would  have  great  power  over  human  motives ;  men 
would  go  to  any  length  to  get  it ;  and  if  they  had  many  things  to 
give  in  exchange  for  it,  it  would  have  great  power  in  exchange. 
The  situation  of  some  thirsty  men  on  a  desert  with  nothing  to 
give  in  exchange  for  water  is,  however,  very  unusual.  In  the 
ordinary  market  place  men  have  something  to  give  for  whatever 
they  desire  most.    The  thing  which  is  intensely  desired,  esteemed, 


196  ELEMENTARY  ECONOMICS 

or  appreciated  will,  under  such  circumstances,  always  command 
many  other  desirable  objects  in  peaceful  and  voluntary  exchange. 

Relation  of  utility  to  value.  There  is,  therefore,  a  very  close 
connection  between  utility  and  value.  Utility  is  the  power  to 
satisfy  a  want  or  gratify  a  desire,  but  value  is  the  power  to 
command  other  desirable  things  in  peaceful  and  voluntary  ex- 
change. Value  depends  upon  utility,  since  nothing  could  have 
value  unless  it  had  the  power  to  satisfy  a  desire  of  some  kind.  In 
other  words,  nobody  would  give  anything  in  peaceful  and  volun- 
tary exchange  for  the  article  in  question  unless  he  desired  it.  On 
the  other  hand,  however  intensely  he  might  desire  it,  if  he  had 
nothing  to  give  in  exchange  for  it,  and  everyone  else  were  in  the 
same  condition,  it  would  not  have  much  power  in  exchange.  The 
water  in  the  foregoing  illustration  would  have  great  utility  but  no 
great  value — certainly  no  great  market  value. 

Censorious  criticisms  upon  market  value.  There  is,  however, 
still  another  sense  in  which  both  value  and  utility  are  sometimes 
used.  One  who  has  strong  ideas  on  the  subject  will  sometimes 
assert  that  a  given  commodity  is  "  really  worth "  very  little,  even 
though  everybody  seems  to  desire  it  and  to  be  paying  a  high  price 
for  it,  or  that  it  is  "really  worth"  a  great  deal,  even  though 
no  one  else  seems  to  esteem  it  or  to  be  willing  to  pay  much 
for  it.  In  this  case  the  speaker  is  assuming  the  function  of  a 
moral  or  economic  censor  and  is  passing  judgment  upon  the 
desires  of  other  people.  His  judgment  may  be  sound  and  that 
of  the  multitude  unsound,  or  vice  versa.  There  are,  however, 
always  those  who  have  ideas  on  the  subject  of  "real"  value  as 
opposed  to  market  value  and  of  real  utility  as  opposed  to  the 
popular  idea  of  utility.  Their  idea  of  "  real "  utility  is  the  power 
to  satisfy  a  commendable  desire,  whereas  economic  writers  have 
generally,  though  not  universally,  defined  utility  as  the  power  to 
satisfy  any  sort  of  desire. 

Distinction  between  value  and  price.  Value  should  also  be 
distinguished  from  price.  The  price  of  an  article,  as  has  been  ex- 
plained many  times  is  merely  its  value  expressed  in  terms  of 
money ;  that  is,  of  some  single  commodity  which  the  community 


VALUE:  ITS  MEANING  197 

has  generally  agreed  upon  as  the  measure  of  value  and  the  medium 
of  exchange.  Whenever  the  word  "price"  is  used,  if  it  is  used 
properly,  it  means  value  expressed  in  money,  or  the  amount  of 
money  which  will  be  given  in  exchange  for  a  certain  article. 
Wherever  the  word  "value"  is  used,  at  least  in  connection  with 
the  general  conditions  of  the  market,  it  means  its  general  power 
in  exchange  against  other  articles,  of  which  money  is  only  one. 
The  cheapening  of  money  tends  to  create  a  general  rise  in  prices 
but  not  a  general  rise  in  values. 

To  summarize,  the  economic  value  of  an  object  is  variously 
defined  as 

1.  Its  price ;  that  is,  the  amount  of  money  for  which  it  sells.    (This 

is  a  wrong  use  of  the  word  "value.") 

2.  Its  utility,  which  may  mean 

a.  Its  power  to  satisfy  any  desire. 

b.  Its  power  to  satisfy  a   commendable  desire.     (This  also  is 

a  wrong  use  of  the  word  "value.") 

3.  Its  power  to  affect  the  well-being  of 

c.  An  individual. 

b.  Society,  or  the  nation.     (This  comes  nearer  to  the  point.) 

4.  Its  power  over  human  motives  : 

a.  Causing  men  to  exert  themselves  in  order  to  get  it. 

b.  Causing  men  to  give  other  desirable  things  in  exchange  for  it, 

because  of 
(i)  The  intensity  of  their  desire  for  it. 
(2)  The  abundance  of  other  desirable  things  in  their  possession. 

Since  we  are  here  concerned  with  the  general  problem  of  ex- 
change and  market  value,  the  last  of  these  four  definitions  will 
be  used  in  this  chapter.  If  we  may  accept  "power  in  exchange" 
as  a  good  working  definition  of  market  value,  or  value  as  it  is 
used  on  the  market  and  in  our  general  system  of  exchange,  several 
questions  will  at  once  arise.  One  of  these  is,  Why  do  some  things 
possess  this  power  and  others  not?  Another  is.  Why  do  some 
things  possess  more  of  it  than  others  ?  Or,  again.  Why  does  the 
same  thing  possess  more  of  it  at  one  time  or  place  than  at 
another  ? 


198  ELEMENTARY  ECONOMICS 

EXERCISES 

1.  Why  do  we  do  so  much  buying  and  selling  ? 

2.  What  are  the  principal  ways  of  getting  a  thing  which  you  want  ? 

3.  How  can  you  get  a  desirable  thing  from  someone  else  without 
force  or  fraud? 

4.  In  what  proportion  of  the  cases  where  you  work  in  association 
with  other  people  do  you  work  under  voluntary  agreement  and  in 
what  proportion  do  you  work  under  authority? 

5.  What  is  the  relation  of  exchange  to  the  division  of  labor? 
Could  there  be  much  specialization  without  exchanging  goods  and 
services  ? 

6.  Could  there  be  much  exchanging  without  some  estimation  of 
the  desirability  of  the  things  exchanged? 

7.  What  is  the  simplest  meaning  of  the  value  of  a  thing? 

8.  Does  the  esteem  in  which  a  thing  is  held  always  and  everywhere 
determine  its  power  in  exchange?     Give  illustrations. 

9.  What  is  the  relation  of  utility  or  usefulness  to  value? 

10.  Is  everything  "really  worth"  exactly  what  it  will  bring  on  the 
market  ? 

11.  How  would  you  distinguish  between  value  and  price? 


CHAPTER  XXII 
VALUE:  ITS  CAUSE  AND  QUANTITY 

Value  attaches  to  concrete  things.  Not  much  headway  can 
be  made  in  discussing  the  question  of  value  until  we  distinguish  be- 
tween things  in  general  and  concrete  units  of  things.  Before  speak- 
ing of  the  value  of  bread  in  general  it  is  necessary  to  speak  of  the 
value  of  a  loaf  of  bread.  Before  speaking  of  the  value  or  the  lack 
of  value  of  air  in  general  we  must  speak  of  the  value  or  lack  of 
value  of  a  given  cubic  yard  of  air. 

If  one  will  look  around  and  see  what  is  going  on,  one  will  notice 
that  men  are  not  exchanging  things  in  general,  but  only  concrete 
units  or  quantities  of  things ;  not  wheat  in  general,  but  a  given 
number  of  bushels  of  wheat  of  a  given  grade ;  not  money  in  gen- 
eral, but  a  given  number  of  dollars,  francs,  or  pounds.  Even  if  air 
or  water  were  exchanged,  it  would  not  be  air  or  water  in  general, 
but  some  cubic  yards  or  gallons  in  definite  number. 

This  distinction  between  things  in  general  and  concrete  units  or 
quantities  will  eliminate  forever  the  confusion  that  sometimes  arises 
when  that  distinction  is  not  made.  For  example,  we  are  some- 
times told  that  air  is  of  immeasurable  utility,  yet  it  has  no  power 
in  exchange.  If  one  will  think,  however,  not  of  air  in  general  but 
of  a  definite  cubic  yard  of  air  which  may  be  boxed  up  (it  might 
even  be  offered  for  sale),  and  then  if  one  will  ask  one's  self  how 
much  utility  to  him  is  possessed  by  that  particular  cubic  yard  of 
air,  he  will  find  that  it  is  of  no  use  to  him  whatever.  If  it  were 
of  any  use  to  him — that  is,  if  he  would  be  any  better  off  with  it 
than  without  it — he  would  be  willing  to  give  something  in  ex- 
change for  it ;  it  would  then  possess  value,  or  power  in  exchange. 

Total  utility  and  final,  or  marginal,  utility.  This  means,  in 
other  words,  that  there  are  two  distinct  ideas  of  utility:  one  is 
total  utility,  and  the  other  is  sometimes  called  specific,  sometimes 

199 


200  ELEMENTARY  ECONOMICS 

final,  and  sometimes  marginal,  utility.  We  gain  an  impression  of 
the  total  utility  of  air  when  we  think  what  would  happen  to  us  if 
all  the  air  in  existence  were  suddenly  annihilated  or  if  we  individu- 
ally were  shut  off  from  access  to  air.  From  this  point  of  view  the 
total  utility  of  air  is  incalculable.  But  if  we  were  to  consider  what 
would  happen  if  a  definite  cubic  yard  were  annihilated  or  if  we  were 
shut  off  from  access  to  it,  we  get  a  very  different  impression.  As  a 
matter  of  fact,  it  would  make  no  difference  to  anybody,  because 
there  would  be  enough  left  to  satisfy  completely  every  desire  for  air. 

The  question  of  more  or  less.  In  this  world  of  adjustment, 
improvement,  and  progress,  or  of  maladjustment  and  retrogression, 
the  problem  of  having  more  or  of  having  less  of  various  things  is 
always  the  important  problem.  How  desirable  is  it  that  there 
should  be  a  cubic  yard  or  a  cubic  mile  more  of  air  than  there  is, 
or  how  undesirable  is  it  that  there  should  be  a  cubic  yard  or  a 
cubic  mile  less  than  there  is  ?  Apparently  this  would  be  a  matter 
of  indifference.  It  is  for  this  reason  that  in  a  practical,  workaday 
world,  where  we  are  trying  to  improve  our  condition  or  to  prevent 
it  from  becoming  worse,  we  place  a  value  on  only  those  things 
which  we  desire  to  see  increased. 

No  social  utility  would  be  promoted  by  increasing  the  supply 
of  air  or  by  offering  a  price  for  increasing  it.  There  is,  therefore, 
no  social  or  individual  reason  why  it  should  possess  any  value  or 
any  power  in  exchange.  On  the  other  hand,  if  you  think  of  an 
article  of  which  you  can  say  that  you  would  be  better  off  if  you 
had  a  little  more  of  it,  or  worse  off  if  you  had  a  little  less  than  you 
have,  you  have  a  perfectly  good  individual  reason  for  increasing 
your  possession.  Of  if  the  community  can  say  that  it  would  be 
better  off  if  it  had  more  of  it,  or  worse  off  if  it  had  less,  then  the 
community  would  have  a  perfectly  good  reason  for  desiring  to  in- 
crease the  supply.    This  is  the  case  with  everything  that  has  value. 

The  moralist's  valuation.  A  moral  philosopher  might  con- 
clude otherwise ;  that  is,  he  might  think  that  the  desires  of  the 
people  were  vicious  and  that  they  would  be  worse  off  if  they  had 
more  of  a  certain  article,  whereas  they  themselves  think  they 
would  be  better  off  if  they  had  more  of  it.    It  is  the  desires  of  the 


VALUE:  ITS  CAUSE  AND  QUANTITY  201 

multitude  rather  than  the  conclusions  of  the  moral  philosopher 
which  determine  market  value. 

The  function  of  value  in  a  society  is  to  induce  producers  to 
produce.  It  is  a  symptom  that  more  of  the  article  possessing  value 
is  wanted.  It  is,  at  the  same  time,  a  means  of  getting  more ;  that 
is,  if  people  will  offer  desirable  things  in  exchange  for  an  object, 
someone  may  be  induced  to  produce  it. 

The  first  law  of  the  market.  The  first  law  of  the  market  is 
that  things  of  the  same  kind  and  quality  tend  to  have  the  same 
value  at  the  same  time  and  place.  That  is  to  say,  at  any  given 
time  and  place,  if  there  are  many  units,  all  exactly  alike  and 
equally  desirable,  they  will  all  tend  to  sell  at  the  same  price  or  to 
have  the  same  power  in  exchange.  If  they  are  unlike,  some  of 
them  being  more  desirable  than  others,  of  course  some  will  have 
more  power  in  exchange  than  the  others.  Again,  the  values  may, 
on  a  feverish  market,  change  from  minute  to  minute ;  that  is, 
so  rapidly  as  to  create  the  illusion  of  selling  at  different  prices  at 
the  same  time.  Or,  again,  in  different  portions  of  the  same  market 
similar  things  sometimes  sell  at  different  prices.  The  tendency, 
however,  is  toward  a  uniform  price  at  the  same  time  and  place. 

Where  a  commodity  has  become  standardized  so  that  there  are 
many  units  that  are  equally  desirable,  it  has  become  customary  to 
buy  the  article  b}^  quantity  without  taking  the  trouble  to  pick  out 
the  specific  units  desired.  Wheat,  coal,  cotton,  pig  iron,  and  many 
other  commodities  are  so  graded  and  standardized  as  to  sell  in 
this  way.  On  the  other  hand,  there  are  a  great  many  commodities 
that  are  not  easily  standardized.  In  these  cases  the  purchaser  will 
usually  insist  on  picking  out  the  individual  units  which  he  desires. 
Race  horses,  dwelling  houses,  farms,  building  lots,  and  a  multitude 
of  other  things  will  probably  always  have  to  be  bought  and  sold 
in  this  way. 

A  thing  has  value  only  when  someone  wants  it.  A  concrete 
article  of  the  kind  just  described  or  a  definite  quantity  of  a 
standardized  article  will  have  power  in  exchange,  of  course,  only 
on  condition  that  somebody  happens  to  desire  it.  No  one  will 
give  any  desirable  thing  in  peaceful  and  voluntary  exchange  for 


202  ELEMENTARY  ECONOMICS 

something  which  he  does  not  desire  to  possess.  Again,  the  quantity 
of  value  which  a  thing  will  possess — that  is,  the  number  of  other 
things  which  will  be  given  in  exchange  for  it — will  depend  on 
how  much  it  is  desired  in  comparison  with  those  other  things.  If 
the  article  in  question  is  very  much  wanted  and  a  number  of  other 
things  are  not  much  wanted,  then  a  considerable  quantity  of  these 
other  things  will  be  given  in  exchange  for  it. 

Two  reasons  why  a  thing  may  not  be  wanted.  The  next 
question  is,  Why  are  some  things  desired  and  others  not?  And 
why  are  some  desired  more  than  others  ?  There  are  two  primary 
reasons  why  an  article  may  not  be  desired  at  all.  In  the  first 
place,  it  may  possess  no  total  utility  ;  that  is,  there  may  be  no  use 
to  which  it  can  be  put,  so  far  as  anyone  knows.  There  are  not, 
however,  very  many  such  things.  The  other  reason  is  that  there 
are  so  many  other  things  just  like  the  one  in  question  as  to  more 
than  satisfy  the  desire.  Where  water  is  very  scarce  the  desire  for 
it  becomes  intense;  where  it  is  abundant  the  desire  is  completely 
satiated,  so  that  if  a  specific  barrel  or  gallon  of  water  were  offered 
for  sale  no  one  would  desire  it  at  all.  In  such  a  situation  water 
would  have  as  little  value  as  though  there  were  no  possible  use  to 
which  it  could  be  put. 

One  might  go  even  farther  and  name  articles  which,  though 
capable  of  satisfying  desires  or  of  being  put  to  important  uses, 
have,  yet  become  worse  than  worthless  ;  that  is,  have  become 
nuisances  through  their  overabundance.  IMany  of  the  weeds  which 
infest  our  iields  belong  in  this  class.  Water  in  a  swampy  region 
also  comes  to  possess  a  negative  value, —  that  is,  men  will  go  to 
considerable  expense  to  get  rid  of  a  part  of  it, — and  yet  it  may 
be  perfectly  good  water,  capable  of  contributing  not  only  to  human 
life  but  to  plant  and  animal  life  as  well.  Rabbits  in  Australia  and 
English  sparrows  in  America  will  serve  as  further  illustrations. 

A  commodity  has  value  only  when  there  is  not  enough  of  it. 
We  therefore  reach  the  general  conclusion  that  an  article  (that  is, 
a  definite  object,  such  as  may  be  bought  and  sold)  has  value  only 
when  it  is  wanted,  and  that  it  is  wanted  only  when  there  are  so 
few  objects  like  it  as  to  leave  the  desire  for  it  partially  unsatisfied. 


VALUE:  ITS  CAUSE  AND  QUANTITY  203 

Following  the  same  line  of  reasoning,  we  may  reach  the  further 
conclusion  that  an  object  has  much  value  when  it  is  much  desired 
and  little  value  when  it  is  not  much  desired.  Its  power  in  exchange 
as  compared  with  other  things  will  depend  on  how  intensely  it  is 
desired  in  comparison  with  other  things. 

Physiological  basis  of  the  law  of  demand  and  supply.  The 
great  law  of  supply  and  demand  is  thus  seen  to  have  a  physiolog- 
ical and  psychological  basis.  The  expression  '' supply  and  de- 
mand "  is  merely  a  formula ;  back  of  this  formula  there  is  the 
physiological  fact  pointed  out  in  Chapter  II.  Every  desire  is 
satiable,  and  the  more  nearly  the  desire  approaches  the  state  of 
complete  satiation,  the  less  intense  it  becomes.  Thus  the  reason 
that  any  superabundant  article  under  ordinary  circumstances  has 
no  value  is  because  it  is  so  abundant  that  every  desire  is  completely 
satiated.  With  a  given  demand,  the  greater  the  supply  the  more 
nearly  all  desires  will  approach  the  point  of  satiation,  and  the 
more  indifferent  everyone's  attitude  toward  the  object  becomes; 
on  the  other  hand,  the  smaller  the  supply  the  more  intense  the 
desire  for  each  unit  of  that  supply,  and  the  more  anxious  men 
are  to  get  it. 

Meaning  of  scarcity.  WTien  we  say  that  an  article  has  value 
only  when  the  desire  for  it  is  left  unsatisfied,  we  are  virtually 
saying  that  it  has  value  only  when  it  is  scarce.  Scarcity  is,  by 
definition,  insufficiency  to  satisfy  desires.  A  thing  may  be  rare 
without  being  scarce — that  is  to  say,  however  little  there  may  be 
of  a  certain  article,  if  that  little  is  more  than  sufficient  to  satisfy 
all  desires  the  article  can  hardly  be  said  to  be  scarce ;  or  how- 
ever much  there  may  be  of  a  thing,  speaking  absolutely,  if  there  is 
not  enough  to  satisfy  all  desires  it  is  said  to  be  scarce.  Flies  in  the 
winter  time  may  be  rare,  but  they  are  not  scarce  in  the  technical 
economic  sense,  since  even  then  there  are  more  than  are  wanted. 
If  we  assume  that  the  article  in  question  is  appropriable,  or  ca- 
pable of  being  possessed  and  enjoyed,  and  not,  like  the  moon,  en- 
tirely beyond  our  reach,  we  may  say  that  anything  which  is  both 
desirable  and  scarce  will  have  power  in  exchange  and  that  nothing 
else  whatever  will  have  that  power. 


204  ELEMENTARY  ECONOMICS 

Social  value.  We  now  approach  a  secondary  phase  of  the  law 
of  value.  Even  though  a  man's  desire  for  apples  may  be  com- 
pletely satiated,  not  only  in  the  present  but  in  the  anticipat^ed 
future,  his  commercial  instinct  may  prompt  him  to  prize  them. 
He  will  prize  them  not  because  he  himself  desires  to  consume  them 
but  because  he  can  trade  them  to  someone  else  for  objects  which 
he  himself  desires.  At  this  stage  he  has  arrived  at  the  point  where 
he  begins  to  take  account  of  social  utility  as  well  as  of  individual 
utility.  If  he  perceives  that  there  is  in  society  around  him  an 
unsatisfied  desire  for  apples,  he  may  make  use  of  that  unsatisfied 
desire  to  acquire  desirable  things  in  exchange  for  his  own  surplus 
apples.  He  is  able  to  use  to  his  own  advantage  this  power  in  ex- 
change which  commodities  possess  on  the  market.  Thus  we  see  a 
great  many  men  producing  articles  far  in  excess  of  their  own  needs 
because  they  know  that  these  articles  are  exchangeable  for  other 
things  which  they  need.  We  see  a  considerable  body  of  men  doing 
nothing  except  to  trade  in  objects  of  general  social  desire.  But 
the  laws  which  govern  social  valuation  are  fundamentally  the  same 
as  those  which  govern  individual  valuation.  There  must  be  some- 
body in  the  community  who  has  less  of  the  object  than  he  wants  ; 
otherwise  neither  the  producer  nor  the  trader  would  be  able  to 
exchange  the  object  for  other  desirable  things. 

Diminishing  utility.  Desire  and  utility  are  reverse  aspects  of 
the  same  thing.  The  desire  exists  in  the  human  being  and  is  that 
which  the  object  of  the  desire  is  capable  of  satisfying.  Utility 
exists  in  the  object  and  is  that  which  is  capable  of  satisfying 
the  desire  of  a  human  being.  Since  every  desire  is  capable  of 
being  satiated,  the  more  nearly  it  comes  to  being  satiated  the 
less  intense  the  desire  becomes.  That  is  why  the  desirability 
of  a  thing  diminishes  as  its  quantity  increases.  This  again  is  the 
physiological  basis  of  the  law  of  supply  and  demand. 

Summary.  To  summarize,  we  find  (i)  that  only  concrete 
units  of  desirable  things  are  bought  and  sold  ;  (2)  that  such  units 
have  value  only  when  there  are  not  enough  to  go  around  and 
satisfy  everybody;  (3)  that  each  human  desire  is  capable  of  being 
completely  satisfied  or  satiated  ;  (4)  that  when  and  where  a  thing 


VALUE:  ITS  CA-USE  AND  QUANTITY  205 

is  so  abundant  as  to  satiate  every  desire  for  it,  it  has  no  value ; 
(5)  that  when  it  is  so  abundant  as  nearly  to  satiate  every  desire 
for  it,  each  unit  will  have  little  value,  because  it  will  not  be  in- 
tensely desired;  (6)  that  when  a  thing  is  so  scarce  as  to  leave 
many  desires  far  from  satiation,  each  unit  will  have  much  value, 
because  it  will  be  intensely  desired. 

EXERCISES 

1.  Do  men  buy  and  sell  things  in  general  or  concrete  units  of 

things  ?     Illustrate. 

2.  What  is  the  difference  between  total  utility  and  marginal  utility? 
Illustrate. 

3.  If  someone  were  to  box  up  a  cubic  yard  of  air  and  offer  to  sell 
it  to  you,  himself  requiring  the  return  of  the  box,  would  you  buy  it? 
Why  not? 

4.  If  someone  were  to  offer  to  sell  you  a  gallon  of  water  when  you 
were  standing  by  a  lake,  would  you  buy  it  ?  Why  not  ?  Would  you 
buy  it  if  you  were  in  a  desert  ?    Why  ? 

5.  Would  the  community  where  you  live  be  better  off  if  it  had  more 
water?  Does  water  command  a  price  in  your  community?  Is  your 
country  a  dry  or  a  wet  country? 

6.  What  is  the  first  law  of  the  market? 

7.  Would  a  thing  have  value  unless  someone  wanted  more  of  it 
than  he  had  already? 

8.  What  is  meant  by  scarcity?    Is  it  the  same  as  rarity? 

9.  What  is  meant  by  the  satiability  of  a  desire  ? 


CHAPTER  XXIII 
SCARCITY 

Causes  of  scarcity.  It  was  shown  in  the  last  chapter  that  a 
thing  must  be  both  desirable  and  scarce  in  order  to  possess  value. 
We  have  now  to  inquire  why  such  things  are  scarce.  There  are 
four  reasons  which  come  within  the  limits  of  our  comprehension. 
These  we  may  call  (i)  'Hhe  niggardliness  of  nature,"  (2)  the 
expansion  of  desires,  (3)  the  cost  of  production,  and  (4)  monopoly. 

"Niggardliness  of  nature."  When  the  term  ''niggardliness  of 
nature"  is  used,  it  is  not  intended  to  cast  reflections  upon  nature 
nor  to  imply  that  she  is  not  bounteous  in  many  respects.  It  is 
merely  to  call  attention  to  a  fact  which  cannot  well  be  disputed ; 
namely,  that  in  many  places  men  have  congregated  in  numbers 
greater  than  nature  has  provided  for.  Desirable  things  are 
scarce  in  those  places,  and  it  is  at  least  necessary  to  bring 
supplies  from  other  places,  where  there  is  a  surplus.  More- 
over, there  are  many  things  that  we  desire  which  nature  does  not 
supply  at  all  in  the  form  in  which  we  desire  them,  though  she 
supplies  the  raw  materials  out  of  which  we  may  make  them. 
Again,  some  things  which  we  desire  can  be  produced  only  at  cer- 
tain times  and  seasons.  They  must  therefore  be  preserved  and 
kept  for  other  times  when  they  will  be  needed. 

Expansion  of  desires.  The  fact  that  nature  does  not  supply 
us  with  everything  we  desire  in  the  exact  forms  and  at  the  exact 
times  and  places  when  and  where  we  happen  to  desire  them  may 
be  due,  first,  to  the  fact  that  we  desire  more  refined  products  than 
grow  in  a  natural  state ;  or,  second,  to  the  fact  that  great  numbers 
of  us  choose  to  live  in  places  where  such  products  do  not  grow  in 
sufficient  abundance.  Therefore  we  must  expect  an  indefinite  con- 
tinuation of  the  condition  wherein  some  desirable  things  are  in- 
sufficient to  satisfy  everybody.   We  shall  therefore  continue  trying 

206 


SCARCITY  207 

to  increase  the  supply  of  desirable  things  in  the  forms  in  which 
they  are  wanted  and  at  the  times  when  and  the  places  where  they 
are  wanted.  This  is  called  the  production  of  utilities  or,  more 
properly,  the  adding  of  utilities  to  material  things, —  form  utility, 
place  utility,  and  time  utility. 

Cost.  If  the  efforts  which  we  have  to  make  in  order  to  get  use- 
ful things  were  altogether  pleasant  and  not  in  the  least  degree 
unpleasant  or  disagreeable,  there  is  no  reason  why  most  things 
might  not  be  produced  in  such  abundance  as  to  satisfy  everybody 
completely.  Some  things,  of  course,  cannot  be  increased  by  any 
human  effort.  Meteoric  iron  has  long  served  as  an  illustration. 
Autographs  of  distinguished  men  of  the  past,  the  paintings  of  old 
masters,  first  editions  of  books,  and  a  number  of  other  illustrations 
might  be  given.  But  if  we  are  speaking  of  an  ordinary  reproduc- 
ible commodity,  we  are  safe  in  saying  that  unless  there  were  some 
difficulty  in  the  way  of  indefinite  reproduction, — some  unpleasant- 
ness, irksomeness,  or  fatigue  connected  with  its  production, — 
its  supply  would  certainly  increase  until  everyone  had  all  he 
wanted  of  it. 

Effort  not  always  irksome.  Illustrations  are  not  hard  to  find 
of  desirable  commodities  which  have  to  be  secured  by  human 
effort,  but  which,  because  the  effort  is  pleasant  rather  than  un- 
pleasant, become  so  abundant  as  to  command  no  price.  Trout  are 
generally  regarded  as  a  delicacy  and  are  greatly  desired.  They  can 
be  caught  only  by  considerable  muscular  effort  and  by  the  exercise 
of  great  patience  and  skill.  And  yet,  in  certain  communities  where 
the  demand  is  not  very  great  and  the  fishing  not  too  arduous,  trout 
are  caught  for  sport  in  such  numbers  as  to  supply  the  neighbor- 
hood. They  become  free  goods  and  are  given  to  those  who  desire 
them  without  money  and  without  price.  If  there  were  more  con- 
sumers, or  fewer  persons  who  enjoyed  the  sport  of  fishing,  there 
would  not  be  enough  to  go  around.  Those  who  did  not  get  as  many 
as  they  desired  would  then  be  willing  to  pay  a  price  in  order  to  get 
more.  The  price  would  be  paid,  virtually,  to  overcome  the  disin- 
clination of  producers  ;  that  is,  the  disinclination  of  unenthusiastic 
fishermen. 


2o8  ELEMENTARY  ECONOMICS 

Disinclination.  All  the  reproducible  things  which  sell  on  the 
market  and  which  are  not  monopolized  are  limited  in  supply 
by  some  form  of  disinclination  or  reluctance  to  carry  on  the  work 
of  production.  This  disinclination  may  resemble  that  which  one 
finds  in  the  average  fisherman,  to  whom  the  work  in  small  doses 
is  not  irksome,  or  it  may  be  of  a  different  sort  altogether.  In  the 
case  of  the  fisherman,  his  work  may  be  pleasant  rather  than  un- 
pleasant up  to  a  certain  point.  Almost  anyone  likes  a  certain 
amount  of  this  kind  of  work,  though  some  of  us  are  easily  satisfied. 
Beyond  that  point  such  work  becomes  irksome  and  fatiguing,  and 
we  keep  at  it  only  on  condition  that  someone  pays  us  for  it.  Up  to 
that  point  it  was  play  ;  beyond  that  point  it  literally  becomes  work. 

Opportunity  cost.  Where  two  kinds  of  work  are  pleasurable 
and  a  person  has  to  choose  between  them,  the  fact  that  he  has  to 
surrender  the  one  form  of  pleasure  in  order  to  pursue  the  other 
introduces  an  element  of  cost  or  sacrifice.  It  is  reported  of  a 
certain  man  that  he  was  passionately  fond  of  gardening,  but  could 
never  stick  to  it,  because  as  soon  as  he  began  to  dig  he  found 
worms,  and  they  reminded  him  of  fishing,  of  which  he  was  even 
fonder  than  of  gardening,  which  then  became  irksome. 

In  other  cases  the  work  is  disagreeable  from  the  very  start. 
There  is  no  element  of  play  in  it.  No  one  will  do  any  of  it  unless 
he  is  paid  for  it.  In  still  other  cases  the  work  itself  would  be 
pleasurable  rather  than  disagreeable  up  to  a  certain  point,  if  it  were 
not  for  the  fact  that  there  is  something  else  that  one  would  rather 
be  doing.  A  boy  might  not  ordinarily  mind  working  in  the  garden, 
but  when  there  is  a  circus  in  town  or  a  ball  game  going  on, 
gardening  suffers  in  his  estimation  by  comparison  with  these  other 
opportunities.  Whenever  we  have  to  work  long  hours  there  are 
pretty  certain  to  be  many  other  and  more  pleasurable  things  which 
we  would  rather  do.  Having  to  give  up  these  other  opportunities 
would  make  our  work  irksome  even  if  it  were  not  so  of  itself. 

The  resistance  which  has  to  be  overcome  in  order  to  get  men 
to  work.  Cost,  or  cost  of  production,  is  the  general  name  which 
we  apply  to  the  resistance  which  has  to  be  overcome  in  order  to 
get  a  thing  produced.    The  real  resistance  is  the  resistance  of  the 


SCARCITY  209 

human  will,  as  shown  by  the  fact  that  even  though  physical  effort 
has  to  be  put  forth,  so  long  as  the  effort  is  pleasurable  it  does  not 
have  to  be  paid  for.  As  soon  as  it  becomes  irksome  it  has  to  be 
paid  for.  It  is  a  matter  of  choice,  and  the  price  paid  is  a  means 
of  influencing  choice.  The  irksomeness  of  the  effort  causes  men 
to  choose  against  putting  forth  the  effort ;  the  price  paid  for  the 
article  causes  them  to  choose  in  favor  of  it. 

Distinction  between  play  and  work.  The  difference  between 
play  and  work  is  found  just  here.  Play  is  effort  of  both  mind  and 
body  which  is  put  forth  for  the  sheer  pleasure  of  the  effort  itself. 
Work  is  effort  which  is  put  forth  for  the  sake  of  some  other  re- 
ward. Under  very  favorable  circumstances  all  necessary  effort 
might  conceivably  take  the  form  of  play,  and  in  that  case  there 
would  be  no  such  thing  as  cost  of  production.  A  community  made 
Up  of  people  with  very  simple  habits  and  very  strenuous  natures, 
and  in  a  very  favorable  environment,  might  possibly  reach  such 
a  delectable  state.  Having  very  simple  habits,  the  inhabitants  of 
this  community  would  be  able  to  get  the  greater  part  of  their 
higher  satisfactions  out  of  those  things  whereof  nature  is  boun- 
teous, such  as  the  sky,  the  clouds,  the  verdure,  and  pleasant 
company.  Living  in  a  very  favorable  environment,  they  could  pro- 
duce such  things  as  had  to  be  produced  with  little  effort.  Having 
very  strenuous  natures,  abounding  in  energy  and  delighting  in 
effort,  they  could  do  the  necessary  work  of  production  without 
any  disinclination  or  reluctance.  This,  however,  would  be  a 
kind  of  earthly  paradise  which  we  may  dream  about  but  are  not 
likely  to  realize. 

Kinds  of  cost.  When  we  say  that  the  price  of  an  article  has 
to  be  high  enough  to  cover  the  cost  of  production,  we  really  mean 
that  it  has  to  be  high  enough  to  overcome  the  disinclination  of 
men  to  do  whatever  is  necessary  in  order  to  produce  it.  This  dis- 
inclination, or  cost,  is  of  various  kinds  and  degrees.  Mention  has 
been  made  of  those  operations  which  are  inherently  disagreeable 
from  the  very  start.  This  may  be  called  disutility,  or  pain  cost. 
In  other  cases  there  is  no  disinclination  until  the  work  has  been 
carried  so  far  as  to  produce  a  sense  of  fatigue.    This  may  be  called 


210  ELEMENTARY  ECONOMICS 

fatigue  cost.  Again,  the  disinclination  may  be  due  to  the  fact  that 
the  work  in  question  prevents  us  from  doing  something  else  which 
we  would  rather  be  doing.  This  is  called  opportunity  cost.  The 
opportunity  which  one  gives  up  may  be  of  two  kinds :  the  thing 
which  one  gives  up  may  be  pleasurable  in  itself  (that  is,  it  may 
be  play  or  amusement)  or  it  may  consist  in  the  opportunity  to 
earn  money  at  some  other  job.  In  either  case  one  must  be  paid 
for  doing  the  thing  in  question,  even  though  it  is  neither  painful 
nor  fatiguing,  otherwise  one  will  avail  one's  self  of  another 
opportunity. 

Diminishing  importance  of  pain  cost.  Of  these  three  forms  of 
cost,  pain  cost  is,  in  our  day,  the  least  important.  In  a  rude  state 
of  society,  when  conditions  were  hard  and  enemies  numerous,  it 
may  have  been  different.  Nowadays,  outside  of  a  few  dirty,  dan- 
gerous, or  otherwise  disagreeable  occupations,  there  is  compara- 
tively little  work  which  is  disagreeable  in  itself.  When  hours  are 
long,  much  of  it  is  likely  to  be  fatiguing  and  irksome  for  that 
reason. 

As  prosperity  and  well-being  increase,  and  general  social  con- 
ditions improve,  opportunity  cost  comes  to  play  a  more  and  more 
important  part.  Even  the  possession  of  high  wages  or  a  large 
income  creates  opportunities  for  amusement  or  pleasure  which 
otherwise  would  not  exist.  One  then  finds  long  hours  more  irk- 
some than  they  would  otherwise  be,  not  because  they  are  more 
fatiguing,  but  because  they  deprive  one  of  those  opportunities  for 
pleasure  which  one's  larger  income  enables  one  to  enjoy.  A  well- 
educated  man  has  more  opportunities  for  the  pleasurable  exercise 
of  his  faculties  than  an  uneducated  man ;  therefore  he  needs  more 
time  in  which  to  do  these  pleasurable  things.  If  his  services  are 
desired,  he  must  generally  be  paid  more  in  order  to  induce  him 
to  give  up  these  other  opportunities.  Far  more  important  than 
that,  however,  is  the  fact  that  a  well-trained  man  has  many  more 
opportunities  to  earn  money  than  an  untrained  man.  Among  these 
opportunities  he  will  choose  only  the  one  which  he  likes  best. 
Whoever  desires  his  services  or  his  products  must  therefore  bid 
against  all  other  opportunities  which  lie  before  the  trained  man. 


SCARCITY  211 

Increasing  cost.  As  population  increases  or  concentrates  in 
certain  areas,  the  natural  resources  of  those  areas  must  either  be 
worked  more  intensively  or  else  the  means  of  subsistence  as  well 
as  the  raw  materials  of  industry  must  be  brought  from  greater 
distances.  To  bring  them  from  greater  distances  obviously  re- 
quires greater  effort,  unless  new  and  improved  methods  of  trans- 
portation are  invented.  Even  with  the  best  methods  attainable 
it  costs  more  to  haul  longer  than  shorter  distances.  To  work 
mines  harder  tends  to  exhaust  them  more  rapidly.  It  is  also  pos- 
sible to  work  land  so  intensively  as  to  exhaust  the  soil  unless 
greater  care  is  taken  to  put  back  in  the  soil  as  much  plant  food  as 
is  used  up  by  the  crops  which  are  taken  off.  To  exhaust  either  the 
mines  or  the  soil  will  obviously  make  greater  and  greater  efforts 
necessary  if  a  large  population  is  to  be  provided  for  on  the  same 
scale  as  before  the  exhaustion  took  place.  Poorer  mines  must  be 
worked,  and  crops  must  be  grown  on  poorer  soil  where  more  effort 
is  required  to  get  the  same  crop. 

Diminishing  returns  and  increasing  cost.  Entirely  apart  from 
the  exhaustion  of  the  soil,  however,  is  the  great  law  of  diminishing 
returns  from  land.  This  law,  which  is  one  phase  of  the  universal 
law  of  variable  proportions,  will  be  discussed  in  detail  in  a  chapter 
devoted  to  that  subject  (see  Chapter  XXIX).  For  our  present 
purpose  it  is  necessary  only  to  state  and  define  the  law. 

It  is  a  well-known  fact  that  land  yields  more  per  acre  under 
intensive  than  under  extensive  cultivation.  By  intensive  cultiva- 
tion is  meant  the  application  of  considerable  quantities  of  labor 
and  capital  to  each  unit  of  land ;  by  extensive  cultivation  is  meant 
the  application  of  smaller  quantities  of  labor  and  capital.  While 
land  can  be  made  to  jdeld  more  when  large  than  when  small 
quantities  of  labor  and  capital  are  used  in  its  cultivation,  still 
there  are  limits  to  this  rule.  In  the  cultivation  of  any  particular 
crop  there  comes  a  point  beyond  which  it  does  not  seem  possible, 
by  any  amount  of  labor,  care,  or  cultivation,  to  increase  the  yield 
appreciably.  Long  before  this  point  is  reached,  however,  there  is 
a  tendency  for  the  land  to  yield  less  in  proportion  to  the  labor 
and  capital  employed,  even  though  it  continues  to  yield  slightly 


212  ELEMENTARY  ECONOMICS 

more  in  proportion  to  the  acres  cultivated  with  each  increased 
application  of  labor  and  capital  to  its  cultivation. 

Rather  than  incur  the  increasing  cost  of  production  which  would 
be  necessary  if  an  increasing  population  should  attempt  to  get  its 
subsistence  from  the  same  soil,  men  have  uniformly  chosen  to 
spread  their  cultivation  over  wider  areas,  thereby  incurring  in- 
creased cost  in  transportation,  or  they  have  resorted  to  inferior 
soils  within  the  boundaries  of  the  original  area,  or  they  have  done 
both.  There  is  no  good  reason  in  the  world  why  they  should  ever 
have  done  either  of  these  things  except  that  which  is  furnished 
by  the  law  of  diminishing  returns. 

We  have,  therefore,  several  reasons  why  increasing  effort  is 
necessary  to  get  increasing  supplies  for  an  increasing  population. 
The  law  of  diminishing  returns  is  one;  the  tendency  toward  the 
exhaustion  of  the  soil,  mines,  and  other  natural  resources  is 
another ;  the  necessity  of  cultivating  inferior  soils  is  another ;  and 
that  of  transporting  materials  greater  distances  is  still  another.  All 
of  these,  however,  are  closely  joined  together,  and  they  mutually 
determine  one  another.  Add  to  these  the  fact  that  increasing  effort 
becomes  increasingly  irksome  both  because  of  increasing  fatigue 
and  of  increasing  opportunity  cost,  and  we  have  what  may  be 
known  as  the  law  of  increasing  cost.  This  law  of  increasing  cost, 
in  turn,  is  the  chief  factor  in  limiting  production  and  keeping  the 
supply  of  various  commodities  so  scarce  as  to  give  them  a  value. 

Monopoly.  Among  the  factors  which  tend  to  make  commodi- 
ties scarce  nowadays,  one  of  the  most  important  is  monopoly. 
A  monopoly  is  an  agency  which  has  sufficient  control  over  the 
supply  of  a  given  commodity  to  fix  its  price.  Without  this  control 
over  the  supply,  neither  principalities  nor  powers  nor  trusts  can 
control  prices.  Without  this  control  over  supply,  any  attempt  to 
fix  prices  above  that  level  which  would  pay  the  cost  of  production 
would  merely  tempt  other  producers  to  enter  the  field  and  take 
the  market  away  from  the  would-be  monopoly. 

Aside  from  the  government,  probably  no  such  thing  as  an 
absolute  monopoly  exists.  A  partial  monopoly  exists  whenever 
an  organization  exercises  sufficient  control  over  the  supply  of 


SCARCITY 


213 


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214  ELEMENTARY  ECONOMICS 

anything  to  enable  it  to  fix  its  price,  even  within  a  narrow  zone, 
independently  of  competition.  This  means  that  the  power  of  a 
partial  monopoly  over  prices  is  not  absolute.  It  may  fix  the  price 
somewhat  higher,  but  not  much  higher,  than  competition  would 
fix  it.  Where  a  monopoly  is  not  absolute,  if  it  attempts  to  fix 
prices  outside  these  limits  it  will  create  competition  and  destroy 
its  power  to  control. 

This  control  may  be  exercised  in  two  ways :  first,  the  monopoly 
may  decide  upon  the  quantity  to  be  produced  and  then  sell  that 
quantity  for  whatever  it  will  bring  on  the  market,  allowing  the 
law  of  demand  and  supply  to  fix  the  price ;  second,  the  monopoly 
may  decide  upon  the  price  at  which  it  will  sell  the  product  and 
then  produce  only  as  much  as  can  be  sold  at  that  price.  This  is 
the  method  usually  followed. 

In  a  genuinely  competitive  industry  the  supply  is  limited  by 
the  cost  of  production.  Producers  will  stop  production  rather  than 
sell  for  any  considerable  time  below  the  cost  of  production. 

EXERCISES 

1.  What  are  the  leading  causes  of  scarcity? 

2.  What  is  meant  by  the  "niggardliness  of  nature"? 

3.  What  is  meant  by  the  expansion  of  desires  ? 

4.  Suppose  that  a  thing  could  be  produced  indefinitely  without 
cost,  would  it  have  any  value? 

5.  What  is  cost  and  what  are  its  principal  forms? 

6.  Does  it  cost  you  anything  to  play  baseball  ?  If  so,  in  what  sense  ? 
Are  you  disinclined  to  play?    Do  you  have  to  be  paid  to  play? 

7.  What  is  the  real  difference  between  work  and  play? 

8.  Are  you  disinclined  to  go  fishing  ?  Do  you  have  to  be  paid  for 
it?  Suppose  that  it  interfered  with  something  else  that  you  would 
rather  do. 

9.  What  is  meant  by  opportunity  cost  ? 

10.  Is  opportunity  cost  growing  more  or  is  it  growing  less  important  ? 

11.  What  is  the  relation  of  diminishing  returns  from  land  to  the 
cost  of  growing  crops  ? 

12.  How  does  a  monopoly  control  prices  ? 


CHAPTER  XXIV 
MONEY 

Money  a  labor-saving  invention.  If  there  is  economy  in 
Specializing  in  production  and  exchanging  products,  there  must 
be  further  economy  in  any  means  or  device  which  enables  us  to 
make  our  exchanges  with  less  trouble.  ]Money  is  such  a  device. 
It  is,  in  fact,  one  of  the  greatest  of  all  labor-saving  devices.  If 
one  will  try  to  imagine  the  difficulties  of  carrying  on  exchange 
without  the  use  of  money, — that  is,  by  means  of  direct  barter, — 
one  will  easily  understand  how  great  a  convenience  money  is. 
Of  course,  without  the  use  of  some  kind  of  money  we  never  could 
have  developed  our  present  highly  specialized  industrial  system. 

Even  if  we  could  imagine  an  industrial  system  based  on  barter, 
the  difficulties  would  seem  almost  insuperable.  The  tailor  who  had 
made  a  coat  and  desired  bread  in  exchange  might  find  difficulty  in 
finding  a  baker  who  happened  to  want  a  coat.  The  dairyman  who 
had  milk  to  sell  would  find  it  difficult  to  know  how  to  collect  pay- 
ment for  the  very  small  quantities  which  he  delivered  to  the 
butcher,  the  baker,  the  tailor,  etc.  These  difficulties  would  be  so 
great  that,  in  all  probability,  there  would  be  comparatively  little 
exchanging.  The  farmer  would  have  to  be  his  own  butcher,  tailor, 
and  shoemaker.  Each  household,  in  fact,  would  have  to  be  almost 
self-sufficing. 

Various  substances  which  have  served  as  money.  Various 
commodities  or  articles  have  served  the  purpose  of  money.  The 
early  colonists  in  America  found  the  Indians  using  a  kind  of  cur- 
rency known  as  wampum,  or  bead  currency.  The  Hudson  Bay 
Company  and  other  companies  that  traded  with  the  Indians  of  the 
interior  developed  a  skin  or  fur  currency,  in  which  the  skins  of 
various  animals  were  recognized  as  standards  of  value  and 
exchanged  at  the  ratios  agreed  upon.    In  ancient  times  various 

215 


2i6  ELEMENTARY  ECONOMICS 

European  peoples  used  cattle  as  currency.  In  the  Homeric  poems 
values  are  frequently  quoted  in  terms  of  oxen. 

So  great  is  the  need  for  money  in  a  society  where  there  is  any 
exchanging  of  desirable  articles  that  almost  anything  which  is 
commonly  used  and  appreciated  may  serve  the  purpose  of  money. 
Among  primitive  herdsmen,  therefore,  cattle  met  the  conditions. 
They  were  universally  esteemed  and  appreciated,  they  were  fa- 
miliar objects  whose  value  was  generally  understood,  and  they 
were  easily  transferable.  They  lacked,  however,  certain  other 
qualities  which  make  modern  metallic  money  convenient. 

Qualities  which  the  money  material  should  possess.  Jevons, 
in  his  "Money  and  the  Mechanism  of  Exchange,"  names  seven 
qualities  which  are  desirable  in  the  material  of  which  money  is 
made.  They  are,  first,  utility  and  value ;  second,  portability ; 
third,  indestructibiUty  ;  fourth,  homogeneity  ;  fifth,  divisibility  ; 
sixth,  stability ;  and  seventh,  cognrzabiKty.  Cattle  possess  only 
the  firsf,  second,  and  seventh  of  these  qualities  and,  perhaps,  to 
a  slight  degree  the  sixth.  That  they  are  useful  to  primitive  herds- 
men is  rather  obvious.  They  furnish  their  own  portability  in  that 
they  can  carry  themselves  about.  They  possess  cognizability  be- 
cause all  are  familiar  with  them.  There  may  be  a  certain  stability 
also  in  their  value,  though  that  is  by  no  means  certain.  The  skins 
of  animals,  used  as  money  by  hunting  tribes,  possess  the  same 
qualities  as  cattle,  but  still  lack  the  others  which  Jevons  deems 
desirable. 

Precious  metals  especially  adapted.  It  has  been  found  that 
the  precious  metals,  especially  gold  and  silver,  possess  all  these 
qualities  in  superior  degree.  If  by  utility  we  mean  desirability, 
or  the  capacity  to  satisfy  a  desire,  there  is  no  doubt  that  gold 
and  silver  possess  this  quality.  They  possess  portability  because 
there  is  considerable  value  in  small  bulk.  This  would  not  be  true 
of  the  coarser  metals.  They  possess  indestructibility  in  a  high 
degree ;  they  do  not  corrode  or  rust  as  iron  would.  They  possess 
homogeneity — that  is,  gold  of  equal  purity  is  essentially  alike  the 
world  over ;  it  may  be  easily  standardized  as  to  quality,  so  that 
one  piece  of  metal  may  be  exactly  as  desirable  as  every  other  piece 


MONEY 


217 


"^^^^Js^ 


of  the  same  size  and  standard  of  fineness.  They  possess  divisibil- 
ity—  that  is,  a  piece  of  gold  or  silver  may  be  divided  into  smaller 
pieces,  and  each  of  the  smaller  pieces  will  have  a  value  in  exact 
proportion  to  its  size.  Each  may  be  melted  down  and  recombined 
into  larger  pieces,  and  each  piece  will  still  have  value  in  proportion 
to  its  size.  This  would  not  be  true  of  diamonds  and  precious 
stones,  though  these  would 
possess  portability  and  in- 
destructibility in  high  degree. 

Gold  and  silver  possess 
stability  of  value  in  a  very 
peculiar  sense.  Over  long 
periods  of  time  they  will 
fluctuate  considerably,  but 
over  short  periods  of  time — 
that  is,  from  week  to  week, 
from  day  to  day,  from  hour 
to  hour — they  will  fluctuate 
very  little ;  whereas  other 
commodities,  such  as  farm 
products,  pig  iron,  and  other 
articles  which  are  largely 
dealt  in,  fluctuate  rapidly 
over  short  periods  of  time. 

Reasons  for  the  stability 
of  goJd  prices.  One  reason 
for  the  stability  of  the  value  of  the  precious  metals  during  short 
periods  is  that  the  mass  of  gold  or  silver  in  existence  at  any  one 
time  is  very  large  in  proportion  to  the  product  of  any  given  year. 
The  total  amount  of  wheat  in  existence  at  the  present  moment  has 
practically  all  been  produced  within  the  last  year,  or  two  years  at 
the  outside.  Of  the  total  gold  in  existence  a  very  small  fraction 
was  produced  within  the  last  year  or  two. 

Since  most  of  the  transactions  in  which  we  use  money  are  short- 
time  rather  than  long-time  transactions,  it  is  more  important  that 
the  money  material  be  stable  in  value  over  short  periods  than  over 


COINS   OF   SYRACUSE 


2l8 


ELEMENTARY  ECONOMICS 


long  periods.  This  is  one  of  the  principal  reasons  why  gold  and 
silver  serve  the  purpose  of  a  money  material  better  than  most 
other  products. 

As  to  cognizability,  the  superiority  of  gold  and  silver  over  other 
materials  is  not  so  great.  The  expert  can  always  apply  tests  by 
means  of  which  he  can  detect  spurious  coins,  but  the  inexpert 
usually  has  to  depend  upon  his  eyes  and  his  ears  and  his  sense 
of  touch.  But  there  are  not  many  other  substances  which  cannot 
be  adulterated  or  of  which  counterfeits  may  not  be  made.  Gold 
and  silver  are  not  particularly  wanting  in  cognizability,  though 
they  are  not  preeminently  superior  in  this  respect. 

For  certain  minor  coins,  however,  neither  gold  nor  silver  is 
well  adapted.  There  is  so  much  value  in  such  small  bulk  in  gold, 
for  example,  that  one  would  need  a  magnifying  glass  and  tools 
more  delicate  than  the  human  fingers  to  handle  gold  coins  of  the 
value  of  our  five-cent  pieces  and  one-cent  pieces.  Mere  physical 
convenience  requires  a  coarser  metal  for  these  small  values. 

The  following  forms  of  money  are  in  use  in  the  United  States. 


KINDS  OF  MONEY  IN  THE  UNITED  STATES 


fGold^ 


Coin-' 


Silver 


Paper 


'  Double  eagle 
Eagle 
Half  eagle 
1^  Quarter  eagle 
Dollar 
Half  dollar 
Quarter 
Dime 

Nickel  (five-cent  piece) 
L  Bronze  (one-cent  piece) 
Gold  certificates 
Silver  certificates 
Treasury  notes 

United  States  notes  (greenbacks) 
National  bank  notes 
Federal  Reserve  notes 
Federal  Reserve  bank  notes 


MONEY  219 

The  coins  are  so  familiar  as  to  require  no  description.  Their 
differences  appeal  readily  to  the  eye.  It  is  noticeable,  however, 
that  comparatively  few  people  note  carefully  the  different  kinds 
of  paper  currency.  The  first  three  forms  of  paper  currency  men- 
tioned in  the  above  outline  may  be  called  warehouse  receipts.  For 
the  convenience  of  the  people  the  Federal  Treasury  issues  these 
receipts  in  return  for  deposits  of  other  forms  of  money.  If,  for 
example,  one  has  a  large  quantity  of  gold  or  silver  coin  and  desires 
something  more  convenient,  he  may  deposit  the  coin  with  the 
Secretary  of  the  Treasury  and  receive  in  return  gold  or  silver 
certificates.  These  merely  certify  that  the  coin  has  been  deposited 
in  the  Treasury.    These  certificates  then  circulate  as  money. 

The  United  States  note,  popularly  known  as  the  greenback,  is 
issued  by  the  Federal  government  as  pure  credit  currency.  The 
issue  of  these  notes  was  authorized  by  act  of  Congress  during  the 
Civil  War  as  a  means  of  financing  the  war ;  that  is,  as  a  means  of 
paying  the  obligations  of  the  government.  The  amount  then  au- 
thorized, with  only  a  slight  reduction,  has  been  kept  in  circula- 
tion ever  since.  The  national  bank  notes  are  technically  known  as 
national  currency.  They  are  secured  by  United  States  bonds  or 
other  securities  deposited  with  the  Secretary  of  the  Treasury. 
They  are  issued  to  the  bank  making  the  deposit  and  bear  on  their 
face  the  name  of  the  bank.  It  is  the  bank,  however,  which  agrees 
to  pay,  rather  than  the  government ;  the  government  merely  stands 
behind  the  bank. 

The  Federal  Reserve  notes  are  issued  to  the  Federal  Reserve 
banks  by  an  agent  of  the  United  States  Treasury,  They  are  sent 
to  the  member  banks  by  the  Federal  Reserve  banks  in  return  for 
deposits  of  commercial  paper  and  are  then  put  into  circulation 
by  the  local,  or  member,  banks.  The  Federal  Reserve  bank  notes 
are  issued  to  the  Federal  Reserve  banks  by  the  United  States 
Treasury  in  return  for  deposits  of  government  bonds,  being  in 
all  essentials  like  the  national  bank  notes,  which  they  are  in- 
tended to  replace. 

Standard  money.  Among  all  these  forms  of  money  there  is  one 
which  is  known  as  standard  money — that  is,  gold  coin.    The 


220  ELEMENTARY  ECONOMICS 

value  of  the  gold  coin  depends  on  the  value  of  the  material  of 
which  it  is  made.  So  long  as  the  present  policy  of  the  government 
is  maintained,  the  value  of  a  gold  coin  will  aways  be  the  same  as 
that  of  the  metal  which  it  contains.  One  reason  for  this  is  that 
the  government  will  undertake  to  coin  all  the  gold  that  is  brought 
to  the  mint  and  to  charge  nothing  for  the  work  of  coining  except 
the  value  of  the  alloy  which  is  put  in.  Since  this  alloy  also  has 
some  value,  this  virtually  means  that  if  you  bring  to  the  mint 
not  only  the  gold  but  also  the  other  materials  which  go  into  the 
coin,  in  the  proper  ratio,  the  government  simply  does  the  work 
of  coining  free  of  charge ;  you  merely  supply  the  raw  material. 
When,  therefore,  there  is  even  the  slightest  tendency  for  the  value 
of  coin  to  rise  above  that  of  bullion,  men  will  anticipate  this 
tendency  by  taking  bullion  to  the  mint.  Since  coin  is  easily  melted 
down  into  bullion,  if  bullion  showed  the  slightest  tendency  to  ex- 
ceed coin  in  value,  that  would  be  anticipated  by  melting  coin 
down  into  bullion.  These  two  processes  make  it  practically  cer- 
tain that  so  long  as  the  government  can  maintain  its  policy  gold 
coin  and  bullion  will  be  identical  in  value. 

Why  not  cheap  money  ?  The  question  has  frequently  been 
raised,  Why  use  such  expensive  materials  as  gold  and  silver 
for  money  ?  Would  not  some  cheap  substance,  such  as  paper  or 
aluminum,  serve  equally  well  ?  Many  long  and  heated  controver- 
sies have  been  waged  over  this  question.  The  so-called  "hard- 
money"  school  have  taken  the  position  that  the  government 
cannot  make  money  ;  it  can  only  stamp  money.  The  stamp  merely 
serves  as  a  certificate  of  its  weight  and  fineness ;  the  market  itself 
must  then  determine  its  value.  The  ''soft-money"  school,  on  the 
contrary,  have  pointed  to  many  historic  instances  in  which  cheap 
materials  have  actually  served  as  money  and  circulated  at  a  value 
which  bore  no  relation  to  the  value  of  the  substance  of  which  it 
was  made.    The  truth  seems  to  be  summarized  as  follows: 

I.  Long-established  customs  in  a  country — such,  for  example,  as 
China,  where  custom  rules  supreme — may  enable  a  kind  of  money 
to  circulate  at  a  customary  value  regardless  of  the  commercial 
value  of  the  material  of  which  it  is  made. 


MONEY  221 

2.  A  government  which  is  in  the  habit  of  using  a  great  deal  of 
compulsion  over  a  people  who  are  in  the  habit  of  submitting 
to  authority  and  compulsion  may  by  its  own  decree  cause  money 
to  circulate  at  legally  established  rates  without  regard  to  the 
commercial  value  of  the  substance  of  which  it  is  made.  But  a 
government  which  is  not  in  the  habit  of  exercising  a  great  deal  of 
compulsion,  and  a  people  who  are  not  in  the  habit  of  submitting 
to  it,  have  to  rely  mainly  upon  voluntary  agreement  among 
individuals  in  most  of  the  relations  of  life. 

3.  Where  voluntary  agreement  rather  than  government  com- 
pulsion is  mainly  depended  upon,  it  has  hitherto  proved  impossible 
to  get  people  voluntarily  to  agree  upon  any  substance  as  the  mate- 
rial for  standard  money  except  something  which  had  a  value  as 
raw  material  commensurate  with  its  value  as  money. 

4.  Cheaper  substances  may,  however,  be  used  in  limited  quan- 
tities as  token  money  even  in  liberal  countries  where  everything 
is  done  by  voluntary  agreement,  under  three  sets  of  conditions: 
(i)  when  the  government  will  give  standard  money  m  exchange 
for  it  —  that  is,  redeem  it  in  gold ;  (2)  when  the  government  will 
accept  it  in  payment  of  taxes  and  other  dues  to  itself ;  (3)  in  small 
quantities  when  the  government  exercises  its  authority  by  com- 
pelling a  creditor  to  accept  it  in  payment  of  a  debt  when  offered 
by  a  debtor. 

Legal  tender.  The  last  is  what  is  known  as  a  legal-tender  law. 
WTiile  it  is  an  exercise  of  compulsion,  it  is  one  to  which  even  liberal 
governments  resort.  It  seems  necessary  in  order  to  preserve  the 
system  of  voluntary  agreement  among  free  citizens. 

EXERCISES 

1.  In  what  sense  is  money  a  labor-saving  device? 

2.  Illustrate  some  of  the  inconveniences  of  barter. 

3.  Name  some  of  the  things  which  have  been  used  as  money. 

4.  What  qualities  are  desirable  in  the  material  of  which  money 
is  made? 

5.  Why  are  gold  and  silver  especially  fitted  to  serve  as  the  money 
material  ? 


222  ELEMENTARY  ECONOMICS 

6.  In  what  sense  is  the  value  of  gold  stable  and  in  what  sense 
is  it  not? 

7.  Why   does   the   value   of   gold    change   so   little   during   short 
periods  of  time? 

8.  Why  is  gold  unsuitable  for  the  making  of  five-cent  pieces  ? 

9.  Name  the  principal  kinds  of  coins  in  use  in  the  United  States. 

10.  Name  the  principal  kinds  of  paper  money  in  use  in  the  United 
States.     Describe  each  kind. 

11.  What  is  meant  by  standard  money? 

12.  Under  what  conditions  can  cheaper  substances  than  gold  or 
silver  be  used  for  money  ? 

13.  What  is  legal  tender  ? 

14.  Which  would  be  better,  to  bear  the  cost  of  the  precious  metals 
as  the  money  material,  or  to  encourage  the  government  to  exercise 
the  authority,  and  the  people  the  obedience,  necessary  to  make  cheaper 
substances  circulate  as  standard  money? 


CHAPTER  XXV 
BANKING 

Promises  to  pay.  Where  business  is  done  on  the  basis  of  volun- 
tary agreement  among  free  citizens  it  is  probable  that  many  kinds 
of  agreement  will  be  made.  Among  these  many  forms  there  will 
probably  be  promises  to  pay  money  or  to  deliver  some  desirable 
object  at  some  future  time.  In  order  that  such  promises  may  be 
accepted,  one  or  both  of  two  conditions  must  exist.  First,  and 
most  important,  the  receiver  of  a  promise  may  have  confidence  in 
the  maker  of  the  p^iiiise5;iJ5tiras~toTiis~Eonesty  and  his  ability 
to  fulfill  ln^~pn5mtse:  Second,  the  receiver  of  the  promise  may  have 
confidence  in  the  power  and  the  willingne^^fJhe_goyernmrat  to 
compel  the  maker  of  the  promise  to  ke'ep  itr^^tJnl€SS-xrrfe  or  both  of 
these  forms^oTTonfidenc^  should  exist,  promises  to  pay  are  not 
likely  to  have  much  value  or  to  be  accepted  widely. 

Need  of  institutions  to  deal  in  promises  to  pay.  In  all  coun- 
tries where  confidence  exists — that  is,  where  men  are  generally 
honest  and  governments  reasonab'ly  efficient — these  promises  come 
to  play  a  large  part  in  free  and  voluntary  exchange.  The  mass 
of  such  promises,  and  the  habit  of  dealing  in  them,  has  come  to 
be  called  the  system  of  credit.  The  most  common  of  these  promises 
are  promises  to  pay  money.  So  common  have  they  become,  and 
there  is  so  large  a  volume  of  them,  that  they  call  for  special 
institutions  or  business  establishments  to  deal  in  them.  These 
establishments  are  now  called  banks. 

The  business  of  a  bank:  receiving  deposits.  The  original 
business  of  a  bank  was  ostensibly  to  deal  in  money,  but  it  has 
developed  into  a  business  of  dealing  in  credit  or  promises  to  pay 
money.  The  way  in  which  an  ordinary  commercial  bank  does  this 
is  very  interesting  and  very  simple.  After  the  bank  is  once  or- 
ganized and  ready  to  do  its  real  work,  the  first  thing  is  to  receive 

223 


2  24^ ^   ELEMENTARY  ECONOMICS 

a  deposit  of  money  ;  that  is,  some  person  leaves  money  in  the  bank, 
perhaps  for  safekeeping,  and  receives  a  certificate  of  deposit. 
This  certificate  is  an  acknowledgment  that  the  person  has  de- 
posited the  money  and  a  virtual  or  implied  promise  to  pay  it  back 
whenever  the  person  wants  it.  The  customer  now  has,  not  money, 
but  the  promise  of  the  bank  to  pay  money  whenever  he  wants  it. 

Making  loans.  The  next  thing  the  bank  does  is  to  make  a  loan 
to  someone  who  wants  money,  receiving  in  return  his  promise  to 
pay  it  back  on  a  certain  date.  This  may  be  a  part  of  the  money 
which  the  above-mentioned  customer  has  deposited. 

When  a  bank  has  many  depositors  to  whom  it  owes  money,  and 
many  borrowers  who  owe  it  money,  it  is,  if  properly  managed,  a 
safe  business  for  all  concerned.  The  depositors  to  whom  the  bank 
owes  money  are  not  likely  to  want  it  all  at  once.  All  the  bank 
has  to  do  is  to  see  that  it  has  in  its  vaults  every  day  a  little  more 
money  than  its  depositors  are  at  all  likely  to  want  on  that  day. 
When  the  bank  is  properly  managed,  its  promises  to  its  depositors 
are  always  good,  and  the  depositors  can  always  get  their  money 
when  they  want  it.  At  the  same  time  all  the  promises  to  pay 
which  it  has  received  from  borrowers  are  always  good,  and  the 
borrowers  will  pay  back  the  money  the  day  it  is  due. 

In  order  to  understand  how  a  depositor  is  safeguarded,  it  is 
necessary  to  go  a  little  more  into  detail.  In  the  case  of  a  state 
bank,  all  the  property  of  the  bank  is  ultimately  available  for 
the  payment  of  the  depositors;  that  is,  if  the  affairs  of  the  bank 
are  wound  up,  every  depositor  must  be  paid  in  full  before  the 
owners  or  shareholders  get  anything  out- of  it.  In  the  case  of 
a  national  bank,  the  bank  notes  which  it  has  issued  take  pre- 
cedence, but  these  are  secured  by  special  forms  of  property 
'  (such  as  government  bonds  and  other  securities)  which  it  has 
deposited  with  the  Federal  Reserve  Board.  All  the  other  prop- 
erty of  the  bank  is  then  available,  as  in  the  case  of  the  state 
banks,  for  the  payment  of  the  depositors.  In  addition  to  this, 
each  shareholder  may  be  assessed  an  amount  equal  to  the  par 
value  of  his  shares  in  order  to  pay  depositors.  Thus  the  share- 
holders, or  owners,  may  lose  all  that  they  originally  put  into 


BANKING  225 

the  business  plus  an  equal  amount,  before  any  depositor  can 
lose  anything.    This  makes  the  depositor  relatively  safe. 

Reserves.  Let  us  now  see  in  what  the  property  of  the  bank 
consists.  In  the  first  place,  there  is  what  is  called  the  reserve. 
This  consists  either  in  cash  on  hand  or  in  part  cash  on 
hand  and_  parT  deposits  in  the  Federal  Reserve  Bank.  This 
reserve—is^equired  to  bear  a  certain  ratio  to  the  total  cash 
obligations  of  the  bank,  and  in  normal  times  is  always  ample.  It  is 
obvious,  however,  that  if  an  abnormally  large  number  of  depositors 
were  to  demand  payment  at  the  same  time  this  reser\'e  would  be 
exhausted ;  that  is  to  say,  the  bank  would  have  no  cash  left. 
Unless  the  bank  could  get  extra  supplies  of  cash,  depositors 
would  then  have  to  wait  until  some  of  the  other  property  of  the 
bank  could  be  turned  into  cash. 

This  other  property,  however,  is  mainly  in  the  form  of  loans  of 
various  kinds,  and  would  be  ample  unless  there  had  been  fraud  or 
bad  management.  Since  most  of  these  are  short-time  loans,  they  are 
being  paid  from  day  to  day,  and  cash  is  rapidly  flowing  in.  Nor- 
mally this  would  replenish  the  cash  reserve  in  a  few  days.  In 
fact,  the  bank  can  usually  call  loans  in  rapidly  enough  to  keep 
its  cash  from  being  exhausted  even  by  an  abnormal  demand. 
In  addition  to  these  short-time  loans,  there  are  usually  a  few 
long-time  loans  and  other  securities.  If  these  are  exhausted 
and  the  affairs  of  the  bank  have  to  be  wound  up,  the  real  estate 
and  office  fixtures  may  be  sold.  If  these  are  not  enough,  the 
owners  of  the  bank  may  be  assessed,  as  indicated  above,  in  order 
further  to  safeguard  the  depositors.  In  short,  nothing  except 
fraudjr  bnH  management  could  cause  a  depositor  to  lose  any, 
portion  of  his  deposit. 

""liTaking  money  more  active.  By  looking  carefully  after  these 
matters  and  by  receiving  many  deposits  and  making  many  loans, 
the  bank  performs  some  very  useful  services  for  the  community 
and  the  nation.  One  of  these  services  is  to  take  money  which 
would  otherwise  have  remained  inactive  and  put  it  to  work.  The 
individual  who  has  a  fund  of  money  which  he  does  not  care  to 
use  right  away  may  deposit  it  with  a  banker ;  someone  else  who 


226  ELEMENTARY  ECONOMICS 

needs  money  right  away  may  go  to  the  banker  and  borrow  it. 
The  banker  is  therefore  the  middleman  who  brings  together  the 
one  who  has  money  to  spare  for  which  he  has  no  immediate  need 
and  the  one  who  has  a  productive  use  for  money  which  he  does 
not  possess.  Without  the  banker  these  two  men  might  have  diffi- 
culty in  finding  each  other.  The  banker  at  least  saves  them  time 
and  trouble. 

Kinds  of  deposits.  The  methods  by  which  a  bank  deals  in 
promises  to  pay  are  by  receiving  deposits  and  making  loans. 
These  are  the  essential  functions  of  all  banks,  but  there  are 
different  kinds  of  deposits  and  different  kinds  of  loans.  The 
principal  classes  of  deposits  are  time  deposits  and  deposits  sub- 
ject to  check.  The  depositor  may  prefer  to  leave  his  money  on 
deposit  for  a  long  or  a  stated  time,  or  he  may  prefer  to  deposit 
it  on  condition  that  he  may  withdraw  it  any  day  when  it  suits 
his  convenience  to  do  so.  The  former  class  of  deposits  are  com- 
monly called  savings  deposits,  and  the  latter,  deposits  subject  to 
check.  The  savings  banks  are  a  special  class  which  receive  savings 
deposits,  whereas  the  ordinary  commercial  banks  receive  deposits 
subject  to  check,  though  many  commercial  banks  have  savings 
departments,  thus  meeting  the  needs  of  both  classes  of  depositors. 

Loans.  The  commercial  bank  whose  depositors  desire  the 
privilege  of  withdrawing  their  deposits  at  any  time,  without 
previous  notice,  must  necessarily  follow  a  somewhat  different 
policy  with  respect  to  its  loans  from  that  which  savings  banks 
may  follow.  The  loans  of  the  commerrial  hank,  arp  mainly 
short-time  loans,  seldom  mor^  than  ninpty  dayr.j  whila  the  titi\rin[;"i 
baTlKTmayTehd  for  longer  time  or  invest  largely  in  mortgages  or 
other  long-time  securities.  ~ 

National  and  state  banks.  National  banks  in  this  country  are 
commercial  banks  that  operate  under  national  law.  State  banks 
operate  under  state  law.  Their  functions  are  the  same  except  that 
Rational  banks  are  permitted  to  issue  bank  notes  while  state  banks 
arenot.   ^ 

"^  Trust  companies.    Trust  companies  were  originally   formed, 
as  their  name  implies,  to  act  as  trustees ;   that  is,  they  would 


BANKING  227 

take  care  of  valuable  papers,  such  as  mortgages  and  other  se- 
curities, collect  interest  on  them,  pay  obligations  when  due, 
execute  wills  and  bequests,  handle  estates  for  people  who  needed 
or  desired  to  be  relieved  of  the  work,  and  perform  a  great  many 
other  similar  tasks.  In  the  course  of  this  work  they  naturally  had 
to  handle  a  great  deal  of  money.  At  one  time  they  kept  this 
money  in  regular  banks,  but  in  recent  times  they  have  generally 
kept  it  in  their  own  vaults  or  have  loaned  a  part  of  it  on  ordinary 
commercial  loans.  This  means  that  they  have  been  doing  a  regu- 
lar banking  business  in  addition  to  the  business  of  a  trust  com- 
pany as  originally  conceived.  In  fact,  it  is  not,  at  the  present 
moment,  easy  to  distinguish  a  trust  company  from  any  other 
commercial  bank. 

Origin  of  the  bank  check.  Originally,  when  a  depositor  who 
had  money  in  a  bank  wished  to  make  a  payment  to  another  person, 
it  was  necessary  for  the  depositor  to  withdraw  his  money  from 
deposit  and  hand  it  to  the  other  person.  A  little  later  the  custom 
grew  of  going  in  person  to  the  bank  and  authorizing  the  bank  to 
transfer  a  certain  sum  from  the  payer's  to  the  payee's  account. 
The  payee  could  then  draw  out  the  money  as  he  needed  it.  From 
this  it  was  an  easy  step  to  the  custom  of  giving  the  bank  a  written 
order  to  pay  a  certain  sum  to  another  person.  This  written  order 
became  known  as  a  bank  check.  These  checks  proved  so  con- 
venient that  they  have  become  one  of  the  principal  means  of 
making  payments.  A  bank  draft  is  merely  a  check  on  one  bank 
drawn  by  another  bank.  A  certified  check  is  a  private  check  which 
the  bank  on  which  it  is  drawn  certifies  or  the  payment  of  which  it 
guarantees. 

Bank  checks  do  not  circulate  quite  so  freely  among  private 
individuals  as  money,  because  each  check  must  be  indorsed  by 
each  person  through  whose  hands  it  passes.  Therefore  a  check 
will  be  accepted  only  from  a  person  whose  signature  is  known  to 
be  genuine.  Since,  however,  paper  money  circulates  without  in- 
dorsement, one  will  accept  it  from  a  stranger  or  a  known  rogue 
unless  one  has  reasons  for  suspecting  the  money  to  be  counterfeit 
or  to  have  been  stolen. 


228  ELEMENTARY  ECONOMICS 

The  clearing  house.  The  vast  increase  in  the  use  of  bank 
checks  in  the  making  of  payments  created,  long  ago,  the  necessity 
for  a  special  institution  known  as  the  clearing  house.  At  the  close 
of  each  day's  business  every  bank  in  a  large  city  finds  itself  in 
possession  of  a  number  of  checks  on  each  of  the  other  banks. 
Originally  messengers  were  sent  the  rounds,  carrying  bundles  of 
checks — a  cumbersome  and  an  expensive  process. 

From  this  it  was  an  easy  transition  to  the  organization  of  a 
regular  clearing  house  to  which  all  those  checks  were  sent.  This 
eventually  became  the  heart  of  the  whole  financial  district.  Most 
of  the  bank  clearings  in  this  country  are  now  done  through  the 
Federal  Reserve  banks.  The  clearing  house  is  essentially  a  banker's 
bank,  where  banks  make  their  payments  to  and  collect  their  obli- 
gations from  one  another  very  much  as  private  individuals  who  do 
business  with  the  same  bank  make  their  payments  to  and  collect 
their  obligations  from  one  another.  The  Federal  Reserve  banks  are 
now  in  a  peculiar  sense  fitted  to  act  as  the  bank  for  the  member 
banks,  thus  taking  the  place  of  the  old-fashioned  clearing  house. 

Domestic  and  foreign  exchange.  This  habit  of  making  pay- 
ments by  means  of  bank  checks  has  extended  beyond  the  limits 
of  any  city  or  of  any  country.  Business  transactions  between 
cities  and  between  countries  are  carried  on  in  much  the  same  way. 
This  necessitates  some  convenient  way  of  balancing  payments 
from  one  city  to  another  and  from  one  country  to  another. 
The  one  method  is  known  as  domestic  and  the  other  as  foreign 
exchange.  If  a  man  in  one  city,  say  Chicago,  must  pay  for 
goods  which  he  has  bought  in  New  York,  and  another  man  in 
Chicago  is  to  receive  an  equal  amount  of  money  for  goods  which 
he  has  sold  to  someone  in  New  York,  it  would  be  much  simpler  for 
the  first  man  to  pay  the  second  man,  thus  canceling  both  debts, 
than  for  money  to  be  sent  both  ways.  Domestic  exchange  is 
merely  a  system  on  which  this  can  be  done  on  a  large  scale 
between  all  the  large  cities.  If  the  men  in  question  live  in  differ- 
ent countries  as  well  as  in  different  cities,  the  same  problem 
arises  and  is  complicated  by  the  difference  in  the  monetary  sys- 
tems of  the  different  countries. 


BANKING  229 

It  will  frequently  happen  that,  for  a  time,  more  money  is 
owed  by  citizens  of  one  country,  say  the  United  States,  to  citi- 
zens of  another,  say  England,  than  is  owed  by  citizens  of  Eng- 
land to  those  of  the  United  States.  In  such  cases  the  debts  do 
not  exactly  cancel  one  another.  If  Americans  owe  more  to 
Englishmen  than  Englishmen  to  Americans,  there  is  said  to  be 
an  unfavorable  balance  of  trade  in  America  and  a  favorable  one 
in  England ;  that  is,  some  money  must  flow  from  America  to 
England  to  pay  the  balance,  and  in  the  opposite  direction  if 
the  balance  of  trade  is  unfavorable  to  England  and  favorable 
to  the  United  States,  Rather  than  send  money  to  England, 
when  the  balance  is  against  us,  paying  the  cost  of  transportation 
and  losing  the  use  of  it  for  a  time,  those  Americans  who  owe  the 
money  will  try  to  find  others  who  have  money  coming  to  them 
from  England,  and  will  even  offer  a  small  premium  for  bills  on 
England.  English,  or  sterling,  exchange  is  then  said  to  be  above 
par  ;  that  is,  the  American  who  is  to  receive  an  English  pound  can 
sell  his  claim  for  a  little  more  than  S4.8665,  which  is  its  par  value 
in  American  money.  When  the  balance  is  the  other  way,  sterling 
exchange  is  below  par ;  that  is,  the  man  who  has  to  wait  and  get 
his  money  from  England  will  sell  his  claim  for  a  little  less  than 
$4.8665  for  each  pound  sterling.  During  the  World  War  the  Eng- 
lish people  had  nothing  to  sell  to  us  and  much  to  buy  from  us. 
The  balance  was  so  overwhelmingly  against  them  as  to  exhaust 
all  their  available  gold,  and  they  could  not  make  any  payments  at 
all  for  a  long  time.  The  pound  sterling  naturally  fell  far  below 
par,  as  it  must  in  all  such  cases,  depending  on  the  probable  lapse 
of  time  before  trade  can  again  reach  a  normal  balance. 

Dealers  in  foreign  exchange  are  merely  middlemen  who  buy 
and  sell  these  obligations  between  countries.  The  man  who  has 
money  coming  to  him  from  another  country  does  not  have  to  find 
a  man  who  owes  the  same  amount  to  the  other  country,  he  merely 
sells  his  claim  to  one  of  these  dealers.  Similarly  the  man  who 
owes  money  to  another  country  does  not  have  to  find  a  man  who 
has  the  same  amount  coming  to  him  from  the  same  country.  He 
merely  goes  to  one  of  these  dealers  and  buys  a  claim  to  cancel  his 


2  30  ELEMENTARY  ECONOMICS 

own  obligation.  It  is  largely  through  these  dealers  in  foreign 
exchange  that  international  payments  are  made  with  very  few 
shipments  of  money. 

Bank  notes.  Certain  banks,  such  as  national  banks,  have  been 
permitted  to  perform  the  special  function  of  issuing  bank  notes 
and  thus  providing  a  circulating  medium  which  answers  the  pur- 
pose of  money  if  it  is  not  itself  a  form  of  money.  They  differ 
from  the  notes  of  an  ordinary  individual  in  that  they  pass  from 
hand  to  hand  without  indorsement. 

The  national  banking  system.  In  1863  the  foundation  of 
our  present  national  banking  system  was  laid,  and  a  series  of 
national  banks  was  created,  partly  as  a  means  of  making  a  market 
for  the  bonds  which  the  Federal  government  wasf  offering  for  sale 
in  order  to  get  money  with  which  to  carry  on  the  Civil  War.  Any 
bank  chartered  under  this  act  was  permitted  to  deposit  bonds  of 
the  United  States  with  the  Secretary  of  the  Treasury,  and  in  return 
for  these  deposits  it  was  permitted  to  circulate  bank  notes  up  to 
90  per  cent  of  the  value  of  the  bonds  deposited.  Thus,  if  a  bank 
failed,  the  government  had  possession  of  enough  of  the  bank's  prop- 
erty to  redeem  all  the  notes  which  it  had  issued.  In  a  sense  the 
bank  had  pawned  valuable  property  (that  is,  government  bonds) 
and  received  a  kind  of  pawn  check  in  return.  These  '^checks," 
called  bank  notes,  it  was  permitted  to  circulate.  This  is  essen- 
tially the  characteristic  of  our  bank  notes  at  the  present  day. 
Subsequent  acts  have  made  some  changes  in  the  system,  particu- 
larly the  act  of  1908,  which  permits  a  national  bank  to  deposit 
certain  other  securities  besides  United  States  bonds  as  a  basis  for 
its  note  circulation. 

The  Federal  Reserve  system.  The  most  important  piece  of 
banking  legislation  in  this  country  since  the  National  Bank  Act 
of  1863  was  the  Federal  Reserve  Act  of  1913.  Under  this  act 
there  was  created  under  the  Treasury  Department  of  the  United 
States  a  Federal  Reserve  Board  consisting  of  five  members,  besides 
the  Secretary  of  the  Treasury  and  the  Comptroller  of  the  Currency. 
This  board  was  charged  with  the  general  administration  of  the 
national  banking  system. 


BANKING  231 

The  country  was  then  divided  into  twelve  districts,  and  within 
each  district  a  city  was  selected  to  be  called  a  Federal  Reserve 
city.  The  cities  chosen  were  Boston,  New  York,  Philadelphia, 
Cleveland,  Richmond,  Atlanta,  Chicago,  St.  Louis,  Minneapolis, 
Kansas  City,  Dallas,  and  San  Francisco.  In  each  of  these  cities 
was  organized  a  Federal  Reserve  bank.  This  bank  was  to  be  the 
central  bank  of  the  Federal  Reserve  system  in  the  district  within 
which  it  was  located. 

All  the  national  banks,  and  all  the  state  banks  which  wished  to 
become  national  banks,  by  coming  in  under  the  Federal  Reserve 
system  were  to  become  member  banks  and  in  a  sense  tributary  to 
the  Federal  Reserve  bank.  The  Federal  Reserve  bank  thus  be- 
comes, in  a  sense,  the  bank  of  the  member  banks  of  its  own  dis- 
trict. It  does  no  business  directly  with  private  individuals,  aside 
from  the  purchase  of  bills  of  exchange  in  the  open  market.  The 
'  Federal  Reserve  banks  themselves  carry  on  their  clearing  through 
a  special  branch  of  the  Federal  Reserve  Board  in  Washington. 
This  may  be  called  the  bank  of  the  Federal  Reserve  banks. 

Agricultural  credit.  The  business  of  agriculture  has  been  the 
slowest  of  all  to  make  a  large  use  of  credit.  One  reason  has  been 
that  there  has  been  no  machinery  designed  to  provide  the  farmers 
with  the  kind  of  credit  which  they  have  needed,  as  the  ordinary 
banks  have  provided  the  merchants  and  manufacturers  with  the 
kind  which  they  have  needed.  The  farmer  needs  comparatively 
little  short-time  credit,  as  the  merchant  and  manufacturer  under- 
stand that  term.  The  bank  which  does  a  regular  check  and  deposit 
business,  whose  deposits  are  continually  being  withdrawn  and  re- 
plenished, must  keep  its  assets  in  liquid  form.  Farm  mortgages 
are  notoriously  hard  to  dispose  of,  and  no  commercial  bank  would 
feel  safe  if  it  loaned  a  large  proportion  of  its  deposits  out  on  that 
kind  of  security. 

Even  what  the  farmer  calls  short-time  credit  is  too  long  for  the 
average  bank.  The  farmer  can  seldom  use  credit  for  less  than 
three  months,  and  he  is  more  likely  to  need  it  for  six,  nine,  or 
twelve  months,  whereas  the  city  borrowers  generally  borrow  for 
shorter  periods,  such  as  thirty,  sixty,  or  ninety  days. 


232 


ELEMENTARY  ECONOMICS 


The  farmer's  chief  need,  however,  is  for  long-time,  or  mortgage^ 
credit  rather  than  for  short-time,  or  personal,  credit.  In  the 
purchase  of  a  farm,  in  the  making  of  durable  improvements,  or 
even  in  the  stocking  or  equipping  of  the  farm,  considerable  sums 
of  money  are  required.  If  he  borrows  for  these  purposes  he  can 
scarcely  hope  to  pay  off  his  debt  inside  of  a  term  of  years.  The 
mortgage  is  the  only  satisfactory  form  of  security  in  cases  of 
this  kind. 

A  very  important  development  of  our  banking  system,  designed 
to  extend  credit  facilities  to  the  farmers  of  the  country,  was  begun 
by  the  act  of  191 6,  inaugurating  our  Farm  Land  Bank  system.  The 


.[Fahmkij]      [FaioiekI      |Far>ieh|     [Far.mkk|      [Farmer| 


general  organization  of  this  system  resembled  that  of  the  Federal 
Reserve  system.  It  is  presided  over  by  a  central  body  known  as 
the  Federal  Farm  Loan  Board.  The  country  was  divided  into 
twelve  districts,  and  in  each  district  a  city  was  selected  as  a  head- 
quarters for  the  Farm  Land  Bank.  The  Farm  Land  Bank  was  to 
operate  throughout  its  own  district  in  the  organization  of  local 
Farm  Loan  Associations. 

Each  Farm  Loan  Association  is  to  be  an  association  of  farm 
owners,  or  those  about  to  become  owners,  who  desire  to  borrow 
money  by  giving  a  mortgage  as  security.  The  individual  farmer 
is  to  deal  only  with  his  local  association.  A  group  of  farmers  form 
themselves,  according  to  specified  rules  and  plans,  into  a  Farm 
Loan  Association.  Each  one  who  wishes  to  borrow  money  gives  a 
mortgage  on  his  farm  to  the  association.  The  association  then  in- 
dorses the  mortgages  received  from  its  own  members  and  sends 
them  to  the  Farm  Land  Bank  of  the  district.    The  Farm  Land 


BANKING  233 

Bank  then  advances  the  money  to  the  Farm  Loan  Association,  and 
the  association  in  turn  advances  the  money  to  each  of  the  farmers. 

When  the  Farm  Land  Bank  has  a  sufficient  number  of  mort- 
gages transferred  to  it  in  this  way,  it  may  deposit  these  mortgages 
with  a  custodian  appointed  by  the  Farm  Loan  Board,  and  it  is 
then  empowered  to  issue  bonds  to  an  equal  amount  and  offer  these 
bonds  for  sale  to  the  general  investing  public.  With  the  money 
received  when  it  ^ells  these  bonds  it  may  buy  more  mortgages 
from  the  local  Farm  Loan  Associations  within  the  district.  On  the 
basis  of  these  new  mortgages  it  may  issue  more  bonds,  and  so  on, 
till  its  outstanding  bonds  equal  twenty  times  the  capital  of  the 
Farm  Land  Bank. 

The  whole  system  is — like  every  other  banking  system — or- 
ganized to  deal  especially  in  promises.  The  farmer  who  wants 
money  gives  in  exchange  for  the  money  a  written  promise  to  pay 
it  back,  together  with  a  low  rate  of  interest.  This  written  promise 
is  transferred  from  the  Farm  Loan  Association  to  the  Farm  Loan 
Bank  and  then  to  a  custodian,  who  keeps  it  safely  until  it  is 
redeemed.  The  Farm  Land  Bank,  in  order  to  raise  money  to  buy 
the  farmers'  promises,  issues  promises  of  its  own,  called  Farm 
Land  B.onds,  which  promise  to  pay  money  and  a  low  rate  of  in- 
terest to  the  holders.  These  promises,  or  bonds,  are  then  sold  for 
money  to  whomsoever  will  buy.  This  money  is  then  used  to  buy 
other  promises  of  other  farmers  or,  as  it  is  more  commonly  stated, 
to  lend  to  other  farmers  on  their  promises  to  pay  it  back. 

If  men  are  permitted  to  work  together  on  the  basis  of  voluntary 
agreement,  they  will  be  pretty  certain  to  see  the  advantages  of 
doing  a  good  deal  of  trading  among  themselves.  It  will  sometimes 
happen  that  a  man  will  want  something  at  once  and  not  have  any- 
thing to  give  in  exchange  for  it.  If  he  is  likely  to  have  something 
in  the  future  which  could  be  given  in  exchange,  he  will  have  the 
problem  of  bridging  that  interval  of  time ;  that  is,  of  getting  at 
once  what  he  wants  and  paying  for  it  later.  The  seller  is  likely 
to  want  a  pretty  definite  promise.  If  this  promise  is  written  down, 
then  the  man  who  receives  it  has  something  that  can  be  transferred 
to  another.   Where  there  are  many  such  promises  in  existence, 


234  ele:^ientary  economics 

there  is  likely  to  be  a  good  deal  of  exchanging.  When  these 
promises  become  not  only  numerous  but  of  many  different  kinds, 
the  business  of  dealing  in  them  becomes  a  large  and  complicated 
business.    It  is  known  as  banking. 

EXERCISES 

1.  Under  what  conditions  are  promises  generally  accepted? 

2.  What  is  the  business  of  a  bank  ? 

3.  How  does  a  bank  get  most  of  the  money  which  it  lends  ? 

4.  What    does   a   bank    do    with    most    of   the    money   which    is 
deposited  in  it? 

5.  What  service  does  the  bank  perform? 

6.  What  is  a  savings  deposit  ? 

7.  What  is  the  use  of  a  bank  check? 

8.  What  is  a  clearing  house? 

9.  What  is  a  bank  note? 

10.  When  did  the  National  Banking  system  of  the  United  States 
originate  ? 

11.  When  did  the  Federal  Reserve  system  originate?     Describe  it 
in  general  outline. 

12.  Describe  the  Federal  Farm  Loan  system. 

13.  In  what  kinds  of  promises  does  it  deal? 


CHAPTER  XXVI 
COMMERCIAL  CRISES 

Confidence  and  stability.  In  the  last  chapter  it  was  shown  that 
promises  to  pay  have  come  to  play  a  very  important  part  in  our 
system  of  exchange.  In  fact,  a  large  part  of  the  business  of  the 
country  is  carried  on  by  means  of  these  promises  to  pay.  Instead 
of  paying  cash  at  the  time  of  a  purchase,  the  buyer  pays,  first, 
with  a  promise;  afterwards,  with  the  thing  —  say  money  —  which 
was  promised. 

It  was  further  shown  that  this  system  of  dealing  in  promises 
depends  upon  confidence.  Let  confidence  be  destroyed  and  no  one 
would  accept  these  promises.  Then  the  would-be  buyer  could  not 
buy  until  he  could  raise  the  cash.  But  if  buyers  postpone  buying, 
sellers  must  necessarily  postpone  selling.  This  means  that  business 
necessarily  slows  down. 

It  was  also  shown  that  the  system  of  dealing  in  promises  to 
pay  becomes  highly  complex  in  our  banking  system,  where  one 
set  of  promises  to  pay  is  balanced  against  another  set.  If  those 
who  borrow  from  the  bank  should  fail  to  pay  their  notes,  the 
bank  would  be  unable  to  pay  its  depositors.  These  depositors,  in 
turn,  might  be  unable  to  pay  the  people  to  whom  they  owe  money. 
This  is  only  one  phase  of  our  interlocking  system  of  credits.  Under 
this  system  the  failure  of  even  a  few  men  to  fulfill  their  promises 
may  destroy,  temporarily  at  least,  the  whole  credit  system  and 
cause  widespread  failure  and  bankruptcy. 

Financial  crises.  The  system  of  credits  gives  rise  to  one  of  the 
most  important  and  most  puzzling  of  all  modern  economic  ques- 
tions, namely,  that  of  the  frequent  recurrence  of  financial  crises 
and  general  industrial  depressions.  A  financial  crisis  is  an  occasion 
when  the  money  market  becomes  suddenly  demoralized,  confidence 
disappears,  and  credit  shrinks.    Everyone  to  whom  money  is  owed 

23s 


236  ELEMENTARY  ECONOMICS 

wants  it  at  once,  but  no  one  wants  to  let  go  of  any  money  in  his 
possession,  for  fear  that  he  may  not  be  able  to  get  any  more. 
Besides,  there  does  not  seem  to  be  money  enough  to  pay  off 
existing  debts. 

If  you  will  imagine  a  group  of  men  doing  business  with  one 
another,  where  each  one  trusts  every  other,  you  will  see  that  a 
large  amount  of  business  can  be  done  with  a  ridiculously  small 
amount  of  money.  Many  transactions  will  be  carried  on  by  means 
of  promises  to  pay  money  instead  of  with  the  money  itself.  Many 
of  these  promises  will  be  balanced  against  one  another  and  canceled 
without  the  use  of  any  money  at  all.  In  other  cases  the  money 
will  be  used  merely  to  pay  balances.  But  if  something  should  hap- 
pen to  destroy  confidence,  so  that  no  one  would  accept  promises, 
but  everyone  demanded  real  money,  there  might  not  be  money 
enough  to  go  around  and  make  the  necessary  payments.  In  that 
case  business  would  have  to  slow  down,  and  only  as  much  business 
would  be  done  as  could  be  done  with  the  small  amount  of  money 
available.  If,  in  addition  to  this,  everyone  held  on  to  all  the 
money  he  could  lay  hands  on,  for  fear  that  he  might  not  be  able 
to  get  any  more,  even  the  limited  amount  of  money  in  circulation 
would  move  slowly,  and  business  would  have  to  slow  down  still 
more.  A  swift  dollar  may  pass  from  hand  to  hand  many  times  in 
a  day,  and  in  this  case  it  will  do  a  large  amount  of  business ;  but 
a  slow  dollar  passes  from  hand  to  hand  only  a  few  times  a  day  and 
does  a  small  amount  of  business. 

Industrial  depression.  An  industrial  depression  is  usually  more 
deep-seated  than  a  financial  crisis  and  usually  lasts  for  a  longer 
time.  It  is  a  general  slowing  down  of  production  because  of  an 
inability  iD^seHgDOife  or  to  get  satisfactory  prices  for  them. 

Various  explanations,  some  intelligent  and  some  absurd,  have 
been  offered  to  account  for  these  depressions.  Overproduction  is 
one  of  the  most  common  and  least  intelligent.  There  may  be  such 
a  thing  as  disproportionate  production,  but  such  a  thing  as  general 
overproduction  is  a  logical  impossibility.  The  production  and 
supplying  of  one  thing  is  a  demand  for  something  else ;  the  more 
production,  the  more  demand.    But  if  some  things  are  produced 


COMMERCIAL  CRISES  237 

and  offered  for  sale,  and  there  is  no  demand  for  them,  it  may  mean 
either  that  those  few  things  are  overproduced  or  that  the  other 
things  which  might  be  exchanged  for  them  are  underproduced. 
In  either  case  it  is  disproportionate  production. 

The  overproduction  theory.  One  phase  of  the  overproduction 
theory  of  industrial  depression  is  that  wages  are  so  low  that  the 
laborer  is  not  able  to  buy  his  own  products.  It  is  argued  that  this 
results  in  an  overproduction  and  glut  on  the  market. 

There  are  many  excellent  reasons  why  wages  should  be  higher 
than  they  are,  but  this  is  not  one  of  them.  So  far  as  its  effect  on 
the  general  purchasing  power  of  the  community  is  concerned,  it 
makes  no  dilTerence  whether  wages  are  high  and  rent,  interest, 
and  profits  are  low,  or  whether  wages  are  low  and  rent,  interest, 
and  profits  are  high.  If  the  laborer  gets  a  small  share  of  the  pro- 
duction of  a  given  industry,  and  the  managers,  landowners,  and 
capitalists  get  a  large  share,  these  have  large  purchasing  power 
and  the  laborer  small  purchasing  power. 

The  value  of  the  whole  product  of  every  industry  goes  to  these 
various  classes,  and  they  have  it  all  to  spend.  If  one  class  pos- 
sesses a  large  share,  and  another  class  a  small  share,  the  total 
amount  to  be  spent  for  other  commodities  is  not  affected  by  that 
distribution.  If  the  laborers  get  absolutely  the  whole  product  of 
an  industry,  there  will  be  no  more  to  spend  on  other  products  than 
if  the  laborers  get  one  half  the  product  and  the  other  participants 
get  the  other  half.  This,  let  it  be  repeated,  has  nothing  to  do  with 
other  and  excellent  reasons  why  wages  should  be  high. 

The  periodicity  theory.  A  certain  periodicity  has  been  ob- 
served in  the  recurrence  of  crises  and  depressions.  It  is  not  always 
easy  to  determine  just  the  interval  that  elapses  between  depres- 
sions. Sometimes  they  come  approximately  twenty  years  apart, 
but  they  have  a  disconcerting  habit  of  coming  at  unexpected  times. 
In  his  book  on  "Economic  Crises,"  Jones  gives  the  table  on  the 
following  page:^ 

1  Edward  D.  Jones,  Economic  Crises.  The  Macmillan  Company,  New 
York,  1900. 


238 


ELEMENTARY  ECONOMICS 
LIST  OF  ECONOMIC  CRISES 


United 
States 

England 

France 

United 
States 

England 

France 

1792-1793 

1S47 

1847 

1847 



1796 

185s 



1804 

1857 

1857 

1857 

1810-1S11 

1866 

1812 

1869 

1813 

1873 

1873 

1873 

1815 

1882 

1818 

181S 

1884 

1884-1885 

1825 

1825 

1825 

1890 

1890 

1890 

1830 

1893 

1893 

1837-1839 

1836-1839 

1836-1839 

In  the  nineteenth  century  it  will  be  noticed  that  there  were 
severe  crises  in  1818,  1837,  1857,  with  lesser  crises  in  1825  and 
1847.  The  severe  crises  seemed  to  come  every  twenty  years  for 
almost  half  a  century.  Again,  there  were  severe  crises  in  1873 
and  1893,  with  a  less  severe  one  in  1884.  Another  one  occurred 
in  1907. 

V'arious  attempts  have  been  made  to  explain  this  apparent 
periodicity.  The  late  William  Stanley  Jevons  developed  an  in- 
teresting theory  of  the  coordination  between  sun-spot  cycles  and 
industrial  depressions.  The  sun-spot  cycles,  he  argued,  had  a 
profound  effect  on  the  weather,  rainfall,  etc.,  and  these  in  turn 
affected  the  agricultural  basis  of  the  world's  wealth.  This  theor}-, 
however,  had  not  been  taken  seriously  by  the  economists  until 
it  was  recently  revived  by  the  interesting  observations  of  Professor 
Ellsworth  Huntington.  It  is  true  he  has  not  developed  the  theory 
at  great  length  as  applied  to  economic  crises,  but  he  has  presented 
strong  evidence  in  favor  of  the  doctrine  that  solar  disturbances 
profoundly  affect  climatic  conditions  and  rainfall,  and  these  in 
turn  have  produced  great  historical  and  economic  disturbances.' 

^  Ellsworth  Huntington,  "  Climatic  Changes  and  Agricultural  Exhaustion 
as  Elements  in  the  Fall  of  Rome,"  Quarterly  Journal  of  Economics,  February, 
1917.  See  also  "  The  Pulse  of  Asia,"  Houghton  Mifflin  Company,  Boston,  1907. 


COMMERCIAL  CRISES  239 

The  overspeculation  theory.  There  is  a  persistent  belief 
among  all  students  of  the  question  that  overspeculation  has  some- 
thing to  do  with  depressions.  When  a  fever  of  speculation  takes 
possession  of  a  community,  the  prices  paid  for  the  articles  in  which 
people  are  speculating  do  not  bear  any  logical  relation  to  their 
real  values.  The  speculator  will  pay  any  price  for  anything,  pro- 
vided he  thinks  he  can  sell  it  later  at  a  still  higher  price.  When 
prices  are  tending  rapidly  upward  he  may  rely  on  the  mere 
momentum  to  carry  them  higher.  There  is  only  one  possible  out- 
come of  this  tendency — a  rapid  fall  in  the  prices  of  the  com- 
modities in  which  men  are  speculating. 

Even  though  the  speculation  takes  place  in  a  single  article,  it 
may  produce  a  profound  economic  disturbance.  The  money  that 
is  absorbed  in  the  speculative  purchasing  of  the  article  in  question 
is  necessarily  withdrawn  from  other  kinds  of  business.  This  in 
itself  produces  some  disturbance.  When  a  fall  in  prices  begins,  a 
general  bankruptcy  among  the  speculators  takes  place.  When  a 
number  of  men  become  bankrupt  and  are  unable  to  pay  their 
obligations,  a  process  begins  which  may  be  compared  to  knocking 
over  one  brick  in  a  row  of  bricks  standing  close  together.  If  one 
individual  who  owes  money  to  another  fails  to  pay  his  debt,  the 
latter,  not  being  able  to  collect  his  money,  fails  to  pay  his  ob- 
ligations to  a  third,  and  so  on ;  one  after  another  fails,  and  the 
bankruptcy  spreads  throughout  the  community  in  a  sort  of  wave 
motion. 

The  real-estate  boom.  The  wave  of  speculation  in  land  which 
is  known  as  a  real-estate  boom  is  one  of  the  most  interesting  and 
instructive  of  all  subjects  of  economic  study.  No  one  has  ever 
been  able  to  explain  just  how  it  starts ;  but  after  it  has  started, 
it  is  not  so  difficult  to  understand.  Something  happens,  let  us  say, 
such  as  the  building  of  a  new  railroad,  the  opening  of  a  new  mine, 
or  the  location  of  a  new  factory,  to  produce  a  very  rapid  rise  in 
the  price  of  city  lots.  Men  double  and  quadruple  their  money 
in  a  short  time  by  merely  buying  and  selling  again  at  a  higher 
price.  This  sets  them  and  others  crazy.  Everyone  wants  to  buy 
lots  for  the  purpose  of  selling  again.    The  first  effect  is  to  increase 


240  ELEMENTARY  ECONOMICS 

greatly  the  number  of  buyers,  and  the  effect  of  this  is  to  send  the 
prices  still  higher.  These  buyers,  as  a  consequence,  also  make 
money  rapidly.  This  attracts  still  other  buyers,  some  of  them 
coming  from  long  distances  to  share  in  the  harvest.  So  long  as 
buyers  are  increasing  faster  than  sellers,  prices  continue  to  go  up  ; 
but  when  the  buyers  become  less  numerous  than  the  sellers,  which 
must  inevitably  happen,  prices  begin  to  fall.  Suddenly  everyone 
becomes  a  seller,  and  there  are  no  buyers  at  all.  Stagnation,  de- 
pression, bankruptcy,  and  general  ruin  ensue. 

The  recovery  is  very  slow.  The  men  who  are  left  with  land  on 
their  hands  are  not  fitted  to  use  it.  They  did  not  want  it  for  use  ; 
they  wanted  it  only  to  sell.  This  means  an  inefficient  use  of  the 
land.  Besides,  even  those  owners  who  are  fitted  to  put  the  land 
to  an  economic  use  are  handicapped  because  they  put  too  much 
money  into  the  land  and  have  too  little  with  which  to  develop  or 
use  it.  Those  who  were  lucky  enough  to  sell  out  in  good  time  are 
very  careful  not  to  let  go  of  their  money  or  to  invest  it  in  pro- 
ductive industry.  Years  usually  elapse  before  the  city  recovers 
from  the  disaster. 

The  overinvestment  theory  means  merely  that  there  has  been 
overinvestment  in  certain  industries,  thus  producing  an  unbalanced 
industrial  system.  It  should,  strictly,  be  called  disproportionate 
investment  rather  than,  ijyerinvestment.^ 

Investment  should  always  be  carefully  distinguished  from  specu- 
lation. The  speculator  buys  merely  to  sell  again  at  a  higher 
price,  without  performing  even  the  mercantile  function  of  saving 
the  time  of  producers  and  consumers.  The  investor  buys  pro- 
ducers' goods  or  durable  consumers'  goods  with  the  idea  of  using 
them  himself  or  of  keeping  them  as  a  source  of  income. 

Overinvestment  in  the  railroads  of  the  Far  West  is  supposed  to 
have  had  something  to  do  with  the  panic  of  1857.  The  railroads 
were  built,  the  money  was  spent  on  their  construction,  and  then 
it  began  to  appear  that  it  would  be  some  years  before  there  would 
be  business  enough  to  put  the  railroads  on  a  paying  basis.  IVIean- 
while  all  that  capital  had  been  diverted  from  other  industries, 
which  suffered  In  consequence.    In  many  cases,  however,  the  shares 


COMMERCIAL  CRISES  241 

ot  the  new  railroad  enterprises  had  been  bought  on  credit.  As 
soon  as  it  appeared  that  dividends  were  not  to  be  speedily  forth- 
coming, the  value  of  the  shares  fell  rapidly,  and  those  who  had 
invested  on  credit  in  many  cases  suffered  bankruptcy. 

There  is  something  also  in  the  very  nature  of  modern  industry 
which  seems  to  render  it  highly  sensitive.  The  countries  which 
show  the  largest  amount  of  enterprise  and  the  adventuring  spirit 
not  only  expand  most  rapidly  but  also,  at  the  same  time,  seem  to 
have  the  largest  number  of  industrial  depressions.  The  tendency 
to  rush  headlong  into  new  enterprises  is  doubtless  an  important 
factor  in  national  expansion,  but  it  also  produces  a  severe  reaction 
when  this  headlong  spirit  rushes  too  far  in  a  given  direction. 

A  special  phase  of  the  overinvestment  theory  is  found  in  the 
growing  importance  of  the  investors'  market  as  distinguished  from 
the  consumers'  market.  There  are  fundamental  reasons  why  there 
should  be  violent  fluctuations  of  the  value  of  producers'  goods  on 
the  investors'  market. 

Let  us  begin  by  noticing  a  few  elementary  facts.  Every  farmer 
knows  that  a  horse  which  will  not  earn  more  than  his  feed,  or  a 
piece  of  land  which  will  not  produce  more  than  it  costs  to  culti- 
vate it,  is  of  no  value.  Likewise  every  business  man  knows  that 
an  establishment  that  cannot  be  made  to  pay  more  than  running 
expenses  is  worth  nothing  except  as  junk. 

This  is  equivalent  to  saying  that  the  value  of  such  an  establish- 
ment— or,  indeed,  of  any  productive  agent — is  determined  not 
by  the  total  value  of  its  product  but  Ey^  the  excess  of  that  total 
value  overand  above  the  running  expenses.  "When,  the  running 
expenses  are  high  and  tlie  output  large,  so  that  the  earnings  de- 
pend upon  small  profits  and  large  sales,  a  very  slight  rise  in  the 
value  of  the  product  may  double  or  more  than  double  the  value 
of  the  establishment,  provided,  of  course,  that  the  rise  in  value 
is  believed  to  be  permanent. 

Let  us  suppose  that  a  certain  shoe  factory  can  be  made  to  turn 
out  100,000  pairs  of  shoes  in  a  year  at  a  uniform  cost  of  S5  a  pair. 
If  these  shoes  cannot  be  sold  at  more  than  S5  a  pair,  the  plant 
is  worthless  ;  but  if  they  can  be  sold  at  $5.25  a  pair,  the  earnings 


242  ELEMENTARY  ECONOMICS 

of  the  plant  will  be  825,000,  which,  capitalized  at  5  per  cent,  will 
make  the  plant  worth  $500,000.  If,  however,  the  price  of  shoes 
should  rise  to  S5.50,  the  earnings  of  the  plant  would  be  doubled ; 
and  if  this  rise  in  value  were  believed  to  be  permanent,  the  value 
of  the  plant  would  be  doubled.  Thus  an  increase  of  only  one 
twentieth  in  the  value  of  the  product  would  double  the  value  of  the 
plant.  In  the  same  way,  a  subsequent  fall  of  one  twentieth  in  the 
value  of  the  product  would  reduce  the  value  of  the  plant  by  one 
half,  while  a  fall  of  one  tenth  in  the  value  of  the  product  would 
destroy  the  value  of  the  plant  altogether. 

This  may  be  stated  as  a  general  law  to  the  effect  that  a  slight 
fluctuation  in  the  value  of  a  product  tends  to  produce  a  violent 
fluctuation  in  the  value  of  the  establishment  producing  it.  Stated 
in  still  more  general  terms,  the  value  of  producers'  .goods,  tends  to 
fluctuate  more  violently  than  the  value  ^Tconsumers'  goods. 

]\Ios^of  these  causes  of  commercial  crises  and  industrial  depres- 
sions are  difficult  to  cure  by  any  kind  of  legislation.  So  long  as 
men  are  free  to  buy  and  sell  as  they  like,  there  will  be  the  possi- 
bility of  unwise  buying  and  selling.  Until  men  become  wise  enough 
to  buy  and  sell  wisely,  there  may  be  a  good  deal  of  bankruptcy. 
When  a  craze  of  unwise  buying  and  selling  takes  place,  it  is  likely 
to  be  followed  by  wholesale  bankruptcy,  the  loss  of  confidence,  the 
slowing  down  of  business,  and  general  hard  times.  Possibly  the 
government  may  curb  certain  kinds  of  speculation,  but  there  are 
so  many  possible  kinds  as  to  cause  one  to  doubt  whether  attempted 
suppression  can  have  a  great  deal  of  influence  or  not.  The  general 
spread  of  business  intelligence,  the  habit  of  careful  and  farsighted 
buying  and  selling,  and  the  gradual  decline  of  the  gambling  spirit 
in  business  will  probably  do  more  than  legislation. 

EXERCISES 

1.  What  effect  does  a  sudden  lack  of  confidence  have  upon 
business  ? 

2.  What  is  meant  by  a  financial  crisis  ? 

3.  What  is  meant  by  an  industrial  depression? 

4.  Can  there  be  such  a  thing  as  general  overproduction? 


COMMERCIAL  CRISES  243 

5.  What  is  meant  by  disproportionate  production? 

6.  What  is  meant  by  the  periodicity  of  industrial  depressions? 

7.  When   did   the   principal   industrial   depressions   occur   in   this 
country  ? 

8.  What  is  meant  by  the  overspeculation  theory? 

9.  Describe  the  progress  and  the  end  of  a  real-estate  boom. 

10.  What  is  meant  by  the  overinvestment  theory? 

11.  Why    does    the    investors'    market    fluctuate    more    than    the 
consumers'  market? 


CHAPTER  XXVII 
INTERNATIONAL  TRADE 

Advantages  of  exchange  among  individuals  of  the  same 
country.  Freedom  of  exchange  between  individuals  is  so  clearly 
advantageous  that  practically  no  one  advocates  serious  restrictions 
upon  it.  Freedom  of  trade  between  different  sections  of  the  same 
country  is  also  generally  approved.  It  would  seem  absurd  for 
the  South,  which  is  peculiarly  adapted  to  cotton  growing,  to  try 
to  be  entirely  self-supporting,  and  especially  to  produce  certain 
things,  such  as  wheat,  for  which  its  soil  and  climate  are  not  so 
well  suited  a^  are  those  of  other  sections  of  the  country.  No  one 
would  advocate  seriously  an  interference  with  the  shipments  of 
wheat  and  wheat  flour  to  the  South  or  of  cotton  to  the  North. 

Advantages  of  exchange  among  individuals  of  different 
countries.  It  is  held  by  a  large  majority  of  the  students  of 
economics  that  the  same  arguments  which  favor  a  policy  of 
freedom  of  exchange  within  the  country  are  equally  strong  in 
favor  of  freedom  of  exchange  between  different  countries. 

The  diversion  of  labor  and  capital  from  the  more  productive 
into  the  less  productive  industries.  The  positive  argument  in 
favor  of  freedom  of  international  trade  rests  upon  one  or  two 
fundamental  propositions.  One  of  these  is  that  the.Iahar-anrl  rapj-_^ 
tal  of  any  region  will  tend  of  themselves  to  seekjtJiQse--Qgportii; 
nities  and  to  develop  those  industries  which  are  most  profitable. 
From  this  it  would  follow  that  any  interference  with  this  process, 
or  any  attempt  to  develop  an  industry  in  a  region  where  it  would 
not  develop  without  special  favors,  must  necessarily  be  a  mistake. 
It  would  merely  divert  labor  and  capital  from  a  more  productive 
to  a  less^productive  industry. 

Against  this  fundamental  proposition  of  the  free-trade  school  the 
protectionists  have  never  been  able  to  launch  a  successful  frontal 
attack. 

244 


INTERNATIONAL  TRADE  245 

There  are,  however,  six  popular  arguments  in  favor  of  protection, 
besides  some  others  that  are  not  so  popular,  though  perhaps  of 
greater  scientific  weight.  These  six  popular  arguments  may  be 
characterized  as  follows :  ( i )  the  balance-of-trade  argument ; 
(2)  the  home-market  argument;  (3)  the  infant-industries  argu- 
ment; (4)  the  standard-of-living  argument ;  (5)  the  anti-dumping 
argument;  and  (6)  the  necessity-for-military-supplies  argument. 

The  balance-of-trade  argument.  By  the  balance-of-trade  argu- 
ment is  meant  the  old  theory  that  a  nation  is  rich  when  it  sells 
abroad  more  than  it  buys.  There  is  a  certain  superficial  analogy 
between  the  condition  of  the  private  individual  and  that  of  the 
nation.  It  looks  at  first  thought  as  though  the  private  individual 
who  was  selling  more  than  he  was  buying  was  getting  rich.  This, 
however,  is  only  an  appearance.  It  is  true  that  so  long  as  he  is 
selling  more  than  he  is  buying  he  is  accumulating  money,  but 
unless  he  sooner  or  later  invests  that  money  it  will  do  him  no 
good.  The  individual  who  accumulates  money  for  a  time,  say 
for  a  year,  is  accumulating  the  power  to  purchase  something 
else  at  a  later  time ;  but  suppose  that  during  the  next  year  he 
invests  all  the  accumulations  of  the  preceding  year,  then  it  will 
happen  that  during  this  next  year  he  will  be  buying  more 
than  he  will  be  selling.  Xo  one  will  argue  that  he  grows  poorer 
by  the  process. 

Similarly  with  the  nation  that  continually  sells  more  than  it 
buys, —  if  it  never  buys  anything  from  the  outside  with  that 
money,  the  money  is  of  no  use  to  it ;  if  it  merely  keeps  it  in  cir- 
culation within  its  own  boundaries,  it  will  have  more  money  in 
circulation,  but  no  more  goods. 

Nothing  could  be  more  elementary  or  more  incontrovertible 
than  that  every  country  must  in  the  long  run  pay  for  its  foreign 
supplies  with  its  own  products.  If  it  happens  to  produce  gold 
and  silver  in  large  quantities,  these  of  course  must  be  reckoned 
among  its  own  products,  and  it  may  pay  for  a  portion  of  its 
foreign  supplies  with  this  gold  and  silver.  In  the  long  run,  there- 
fore, the  country  that  restricts  importation  must  necessarily,  and 
in  exactly  the  same  degree,  restrict  exportation. 


246  ELEMENTARY  ECONOMICS 

The  home-market  argument.  The  home-market  argument 
has  been  peculiarly  effective  with  farmers.  It  has  been  pointed 
out  to  them  that  unless  factories  are  built  up  in  their  own 
neighborhood,  they  must  depend  upon  distant  markets  for  the  sale 
of  their  products.  To  sell  their  products  in  these  distant  markets 
and  get  their  own  supplies  back,  it  is  said,  involves  heavy  expenses 
in  the  form  of  freight  rates.  If  these  expenses,  however,  were  so 
heavy  as  to  overbalance  the  other  advantages  and  disadvantages 
involved,  manufacturing  would  be  developed  in  the  home  market 
without  any  government  aid  or  interference.  If,  for  example,  the 
difference  in  the  cost  of  growing  wheat  in  Alabama  and  North 
Dakota  were  less  than  the  freight  rates  from  North  Dakota  to 
Alabama,  Alabama  would  find  it  advantageous,  without  any  gov- 
ernment help,  to  grow  her  own  wheat ;  but  if  it  costs,  let  us  say, 
twenty  cents  more  per  bushel  to  grow  wheat  in  Alabama  than 
in  North  Dakota,  and  the  freight  rate  is  only  ten  cents,  then  it 
would  be  more  profitable  to  import  wheat  or  wheat  flour  from 
North  Dakota. 

The  infant-industries  argument.  As  to  the  infant-industries 
argument,  there  is  undoubtedly  something  to  be  said  on  the  side 
of  protection.  The  argument  is  good,  however,  only  on  condition 
that  the  infant  industry,  after  it  is  once  established  and  ceases  to 
be  an  infant,  is  able  to  take  care  of  itself  without  further  protec- 
tion. If  it  is  not,  and  if  it  continually  needs  protection,  it  becomes 
not  a  policy  for  the  protection  of  infant  industries  but  a  policy  for 
the  protection  of  those  that  are  in  a  state  of  senile  decay.  It  is  a 
policy  for  keeping  alive  industries  that  ought  to  be  dead. 

There  is  another  rather  fundamental  objection  to  a  protective 
policy  based  on  the  infant-industries  argument.  No  matter  how 
much  protection  is  given  to  any  industry,  there  will  always  be 
certain  establishments  that  are  just  on  the  margin  of  bankruptcy. 
There  will  be  men  who  are  so  poorly  qualified  for  managing  a 
business,  or  who  have  located  their  businesses  in  such  disadvan- 
tageous places,  that  they  have  to  compete  with  more  productive 
industries  for  their  labor  and  supplies,  and  are  thus  barely  able  to 
keep  going.    Any  attempt  to  double  and  treble  the  amount  of 


INTERNATIONAL  TRADE  247 

protection  merely  calls  into  existence  business  establishments  run 
by  less  qualified  managers  or  located  in  less  advantageous  posi- 
tions, so  that  with  respect  to  business  establishments  it  becomes  a 
truism  that  "  the  poor  ye  have  always  with  you."  Conversely,  any 
attempt'  to  take  away  or  reduce  the  amount  of  protection  will 
necessarily  mean  bankruptcy  to  those  marginal  establishments. 
They  can  always  bring  pressure  to  bear  upon  Congress  and  can 
always  show  convincingly  that  they  would  be  ruined  if  protection 
were  taken  away.  Thus  the  infant-industries  argument  sooner  or 
later  inevitablx_L£C02aes^an__argument  in  behalf  of  the  inefficient 
pr60i(^r___  '        ^-^ ~~ 

The  standard-of-living  argument.  By  the  standard-of-living 
argument  is  meant  the  argument  that  since  American  laborers  get 
higher  wages  and  maintain  a  higher  and  more  expensive  standard 
of  living  than  most  foreign  laborers,  it  is  necessary  to  compensate 
the  manufacturer  for  these  higher  wages  by  enabling  him  to  get 
somewhat  higher  prices  for  his  product.  From  the  free-trader's 
point  of  view  this  looks  like  putting  the  cart  before  the  horse. 
The  reason  why  wages  are  higher  in  one  country  than  in  another 
is  oecause  labor  is  more  productive  in  the  one  than  in  the  other. 
If  labor  is  more  productive  the  laborer  creates  the  product  out  of 
which  his  higher  wages  are  to  be  paid.  We  have  had  such  an 
abundance  of  natural  resources  and,  on  the  whole,  compared  with 
old  and  overcrowded  countries,  such  a  dearth  of  labor  that  the 
marginal  productivity  of  labor  has  been  high  in  this  country. 
The  unprotected  industries  pay  these  wages  as  well  as  the  pro- 
tected. Therefore  it  would  be  a  mistake  to  tax  the  more  produc- 
tive industries  in  order  to  allow  a  bounty  or  a  higher  price  to  the 
less  productive  industry. 

The  anti-dumping  argument.  As  to  the  anti-dumping  argu- 
ment, there  is  a  certain  justification  for  it.  By  the  anti-dumping 
argument  is  meant  the  argument  that  an  old  and  well-established 
industry  may,  whenever  it  finds  itself  with  a  surplus  product  which 
is  difficult  to  sell  in  its  own  country,  offer  it  for  sale  in  a  foreign 
country  far  below  the  cost  of  production ;  or,  as  the  argument  is 
put  in  the  country  where  protection  is  advocated,  the   foreign 


248  ELEMENTARY  ECONOMICS 

producer  may  dump  his  surplus  onto  our  markets  and  demoralize 
the  business  of  production  here. 

In  so  far  as  this  dumping  policy  is  temporary  and  spasmodic, 
there  is  a  good  deal  to  be  said  in  favor  of  a  policy  which  will 
restrict  it.  If,  for  example,  a  group  of  foreign  manufacturers  were 
to  dispose  of  a  temporary  surplus  in  this  country  far  below  the 
cost  of  production,  and  keep  it  up  spasmodically  for  a  few  years, 
it  might  cause  bankruptcy  among  our  own  producers  and  dis- 
courage others  from  entering  the  business.  As  a  result  we  might 
find  ourselves  in  a  short  time  with  no  industry  of  our  own  in  that 
field.  Then  the  foreign  producers  would  no  longer  need  to  dump 
their  surplus  onto  us,  but  could  charge  us  a  good  high  price. 

On  the  other  hand,  if  the  policy  of  dumping  a  surplus  product 
onto  us  is  a  permanent  one,  there  is  everything  to  be  said  in  favor 
of  allowing  it  to  go  on  and  allowing  the  home  industry  to  die 
out.  It  merely  enables  us  to  get  permanently  a  product  much 
cheaper  than  we  could  produce  it  ourselves.  The  labor  and  capital 
which  would  otherwise  be  engaged  in  this  industry  would  now 
better  be  engaged  in  some  other. 

The  military-defense  argument.  So  long  as  war  is  a  possibil- 
ity the  necessity  for  military  defense  will  remain  with  us ;  and  so 
long  as  we  must  be  prepared  for  military  defense  the  argument 
in  favor  of  producing  certain  essential  military  supplies  at  home, 
even  at  greater  cost  than  they  could  be  produced  abroad,  will  be 
overwhelming.  It  is  obvious  that  at  the  very  time  when  we  need 
military  supplies  most  —  in  time  of  war — we  may  not  be  able  to 
get  them  at  all  if  we  depend  upon  foreign  sources.  This  would 
apply  not  only  to  military  supplies  in  the  technical  sense,  such  as 
guns  and  ammunitions,  but  also  to  every  article  which  is  indis- 
pensable in  time  of  war.  It  might  easily  happen  that  a  nation 
would  fail  in  its  military  operations  by  reason  of  a  lack  of  some 
single  military  article  like  nitrogen  or  copper,  and  suffer  a  national 
disaster  and  humiliation  in  consequence.  Until  we  can  be  reason- 
ably certain  that  war  has  been  permanently  eliminated,  the  argu- 
ment for  government  encouragement  of  the  production  of  every 
indispensable  military  article  is  overwhelming. 


INTERNATIONAL  TRADE  249 

EXERCISES 

1.  If  it  is  advantageous  to  permit  near  neighbors  to  exchange 
products,  why  is  it  not  advantageous  to  permit  distant  neighbors  to 
do  the  same  if  they  care  to  do  so? 

2.  If  two  individuals  who  live  in  the  same  country  find  it  to  their 
mutual  advantage  to  trade  in  legitimate  commodities,  should  they  be 
forbidden  to  do  so  ?     Suppose  they  hve  in  different  countries  ? 

3.  What  is  meant  by  the  balance-of-trade  argument?  How  far  is 
it  vaUd  ? 

4.  What  is  meant  by  the  home-market  argument?  How  far  is  it 
valid  ? 

5.  What  is  meant  by  the  infant-industries  argument?  How  far 
is  it  vahd  ? 

6.  WTiat  is  meant  by  the  standard-of-Uving  argument?  How  far 
is  it  valid? 

7.  What  is  meant  by  the  anti-dumping  argument  ?  How  far  is  it 
valid  ? 

8.  WTiat  is  meant  by  the  necessity-for-military-supplies  argument? 
How  far  is  it  vahd? 


PART  FIVE.    DIVIDING  THE  PRODUCT 
OF  INDUSTRY 


CHAPTER  XXVIII 

THE  BARGAINING  PROCESS 

Voluntary  agreement.  We  saw  in  Part  Four  that  the  exchang- 
ing of  goods  and  services  forms  an  important  part  of  the  economic 
life  of  every  nation.  This  involves  a  vast  amount  of  bargaining. 
Under  this  system  the  average  man's  prosperity  will  depend  largely 
upon  whether  he  can  bargain  advantageously  or  not.  If  he  has 
some  product  or  some  service  to  sell,  and  is  in  a  favorable  position 
for  selling  it,  he  will  prosper;  otherwise  not.  This  bargaining 
process,  however,  is  a  part  of  the  system  of  voluntary  agreement, 
which  is  the  basis  of  all  human  relations  in  free  countries.  Why 
some  prosper  and  others  fail  under  this  process,  or  why  some  pros- 
per more  than  others  under  it,  is  one  of  the  most  important  of  all 
economic  questions.  If  we  can  answer  that  question  we  shall  have 
the  explanation  of  the  great  inequalities  of  riches  and  poverty 
which  form  so  regrettable  a  phase  of  modern  life.  If  we  can  find 
the  explanation  of  these  inequalities  in  bargaining  power,  we  shall 
then  be  in  a  position  to  apply  remedies.  Without  this  explanation 
we  can  know  nothing  whatever  about  remedies. 

Universal  abhorrence  of  violence  and  fraud.  But,  first,  let  us 
go  back  to  first  principles.  Every  civilized  country  regards  vio- 
lence and  fraud  as  hateful.  In  our  country,  in  particular,  and  in 
others  with  the  same  moral  ideas  as  ourselves,  it  is  recognized  as 
wrong  for  anyone  to  get  any  desirable  thing  by  either  of  these 
methods.  Consequently  the  laws  of  the  land  refuse  to  recognize 
anyone's  title  to  anything  which  he  gets  by  either  of  these  methods. 
There  is  also  a  tendency  to  recognize  his  title  to  anything 
which  he  can  secure  by  any  other  method  whatsoever  and,  when 
he  has  once  got  it  by  any  other  method,  to  protect  him  in  its 
possession  against  all  violent  or  fraudulent  methods  of  dispossessing 
him  of  it. 

253 


2  54  ELEMENTARY  ECONOMICS 

Other  methods  of  getting  what  you  want.  What  are  the 
other  possible  methods  by  which  a  man  can  get  what  he  wants  ? 
First,  he  may  find  and  appropriate  it,  provided  no  one  else  has 
already  appropriated  it.  Second,  he  may  make  it,  if  it  is  a  thing 
which  can  be  made  and  if  he  can  get  the  raw  materials  without 
violence  or  fraud.  Third,  he  may  get  it  from  someone  else.  But 
since  he  is  forbidden  to  use  violence  or  fraud,  he  must  get  it  from 
someone  else  with  that  person's  full  and  free  consent — that  is, 
by  his  voluntary  agreement  to  give  it  up.  Therefore,  there  are 
not  many  ways  of  getting  the  thing  you  want  from  another  person, 
(i)  You  may  secure  it  as  a  gift.  (2)  You  may  inherit  it.  (3)  You 
may  get  it  in  peaceful  and  voluntary  exchange. 

Finding,  making,  and  buying.  All  of  these  methods  are  recog- 
nized by  the  laws  of  our  country  and  of  most  civilized  countries. 
"  Finding  is  keeping  "  is  an  old  adage  which  recognizes  the  superior 
claim  of  the  person  who  first  finds  a  thing.  Your  only  way  of  get- 
ting it  away  from  him,  under  the  system  of  voluntary  agreement, 
unless  he  decides  to  give  it  to  you  of  his  own  good  will,  is  to  buy 
it  of  him.  You  are  not  allowed  to  take  it  from  him  by  violence 
or  fraud.  Again,  if  he  makes  it  from  materials  which  he  has 
secured  without  force  or  fraud,  it  is  recognized  as  his,  and  no 
one  can  take  it  from  him  except  by  his  own  free  consent.  Finally, 
if  you  do  secure  it  from  either  its  finder  or  its  maker  by  his  free 
consent,  without  force  or  fraud,  by  a  peaceful  and  voluntary  ex- 
change, then  it  is  yours  in  as  full  and  complete  a  sense  as  it  was 
his  before  the  exchange.  You  are  now,  as  he  was  before,  protected 
against  force  or  fraud,  and  no  one  else  can  get  it  from  you  except 
by  the  method  of  voluntary  agreement. 

The  frequent  desire  to  get  something  which  someone  else  pos- 
sesses, leads,  under  this  system  of  voluntary  agreement,  wherein 
force  and  fraud  are  forbidden,  to  the  vast  process  of  exchange  and 
the  all  but  universal  bargaining  process.  In  this  age  of  specializa- 
tion no  one  can  find  or  produce  everything  that  he  wants.  Every- 
body, therefore,  wants  many  things  which  he  can  get  from  other 
people  only  by  the  bargaining  process.  How  many  of  these  things 
he  can  get  will  depend  upon  what  he  has  to  give  in  exchange  and 


THE  BARGAINING  PROCESS  255 

how  much  power  in  exchange  these  things  have,  or  how  much 
bargaining  power  they  give  him. 

Sources  of  unusual  bargaining  power.  Some  few  become 
immensely  rich  by  finding  something  which  possesses  great  power 
in  exchange.  One  who  finds  hidden  treasure,  a  gold  mine,  a  rich 
oil  or  gas  well,  is  regarded  as  having  come  legally  into  possession 
of  it.  He  is  therefore  protected  against  force  or  fraud  as  impar- 
tially as  though  he  had  found  or  made  an  article  of  little  value  or 
importance.  Under  the  system  of  voluntary  agreement  he  may 
become  a  very  rich  man,  merely  because  he  happened  to  find 
something  which  other  people  want  and  for  which  they  are  willing 
to  pay  him  large  sums.  It  is  true  that  he  did  not  produce  his 
wealth,  neither  did  any  of  those  who  want  to  get  it  away  from 
him.  He  has  not  robbed  nor  defrauded  anybody,  and  the  law,  as 
it  now  is,  will  not  permit  anybody  else  to  rob  or  defraud  him. 

Again,  if  he  is  such  a  genius  as  to  make  something  which  others 
want  badly  and  for  which  they  are  willing  to  pay  large  sums,  he 
may  become  immensely  rich.  Being  protected  against  force  and 
fraud,  he  cannot  be  dispossessed  without  his  consent,  and  if  he 
chooses  to  ask  a  high  price,  there  is  nothing  to  do  but  to  pay  it 
or  do  without  the  article. 

Again,  if  he  brings  something  to  the  free  and  open  market,  by 
peaceful  and  voluntary  exchange,  robbing  and  defrauding  nobody, 
its  price  may  go  up  or  down.  If  it  goes  up  it  is  because  people 
decide  that  they  want  it  more  intensely  than  they  did  before. 
Nevertheless,  under  our  laws  against  force  and  fraud,  he  cannot 
be  dispossessed  except  by  peaceful  and  voluntary  exchange.  If  he 
sees  fit  to  exact  a  high  price,  and  the  circumstances  are  such  as  to 
give  him  great  bargaining  power,  he  is  likely  to  prosper. 

Inequalities  of  bargaining  power.  These  possibilities  are  men- 
tioned to  show  that  under  our  system  of  voluntary  agreement  and 
the  bargaining  process  great  bargaining  power  and  great  pros- 
perity may  come  to  a  man  occasionally  through  no  fault  and  no 
merit  of  his  own.  An  equal  number  of  illustrations  could  be 
furnished  to  show  that  low  bargaining  power  and  low  prosperity 
may  occasionally  come  to  a  man  through  no  merit  and  no  fault  of 


2  56  ELEMENTARY  ECONOMICS 

his  own.  Nevertheless,  with  all  these  possibilities  in  mind,  wise 
men  will  think  twice  before  deciding  to  give  up  the  system  of 
voluntary  agreement.  It  has  its  dangers,  but,  with  all  its  faults, 
it  has  proved  the  best  system  that  has  ever  been  tried.  It  is 
the  only  system  under  which  free  men  can  possibly  live. 

Aside  from  lucky  finds,  strokes  of  genius,  and  fortunate  turns  of 
the  market,  what  are  the  conditions  that  give  greater  bargain- 
ing power  to  one  class  than  to  another?  The  answer  must  be 
found  by  studying  the  conditions  of  the  market  in  which  they  sell 
their  products  or  their  services.  In  the  following  chapter  we  shall 
study  some  of  the  fundamental  conditions  which  determine  the 
market  value  of  the  services  which  each  class  has  to  sell. 

EXERCISES 

1.  What  is  meant  by  the  bargaining  process? 

2.  What  bearing  has  it  upon  differences  in  prosperity? 

3.  Suppose  bargaining  power  to  be  equal  among  all  people,  could 
there  be  any  great  differences  in  prosperity? 

4.  If  you  have  something  which  many  want  and  which  few  possess, 
does  it  give  you  great  bargaining  power  or  small  bargaining  power  ? 

5.  If  you  have  something  which  few  want  and  many  possess,  does 
it  give  you  great  bargaining  power  or  small  bargaining  power? 

6.  If  you  can  do  something  which  many  want  to  have  done,  but 
which  few  can  do  as  well  as  you  can,  is  your  bargaining  power  great 
or  small? 

7.  If  you  are  only  able  to  do  something  which  many  others  can  do 
as  well  as  you  can,  and  which  few  care  to  have  done,  is  your  bargain- 
ing power  great  or  small? 

8.  Could  many  things  be  done  by  voluntary  agreement  among  free 
citizens  if  violence  or  fraud  were  generally  permitted? 

9.  If  you  are  not  permitted  to  use  violence  or  fraud,  how  could  you 
get  from  another  citizen  something  which  he  has  and  which  you  want  ? 

10.  Suppose  that  the  price  of  what  you  possess  rises  or  falls  on  the 
market,  how  does  that  affect  your  bargaining  power? 

11.  Can  there  be  a  free  country  where  men  are  not  free  to  do  a 
great  many  things  by  voluntary  agreement  among  themselves?  Does 
this  mean  that  there  will  be  a  great  deal  of  bargaining  ? 


CHAPTER  XXDC 
THE  LAW  OF  VARIABLE  PROPORTIONS 

Prosperity  and  bargaining  power.  The  ability  of  individuals 
or  classes  to  prosper  under  the  system  of  voluntary  agreement  will 
depend  upon  their  ability  to  sell  whatever  they  have  to  sell  at 
a  good  price.  It  is  mainly  a  matter  of  market  conditions.  The 
laborers,  who  have  labor  to  sell,  may  adopt  various  bargaining 
devices,  but  in  the  main  the  price  of  their  labor  will  depend  upon 
market  conditions  rather  than  upon  their  bargaining  methods  or 
devices.  The  same  will  be  true  of  the  landowners,  the  capitalists, 
the  technicians,  the  independent  business  men,  and  every  other 
class.  Our  first  problem  must  be,  therefore,  to  study  the  market 
value  of  each  factor  of  production  in  order  to  find  out  why  the 
seller  in  each  case  gets  a  large  or  a  small  share. 

Income  a  price  received  for  services.  The  income  of  each 
class,  however,  is  a  flow  rather  than  a  fund  or  a  lump  sum.  The 
laborer  sells  not  himself,  but  the  flow  of  productive  energy  which 
he  can  exert  during  a  given  period  of  time.  The  capitalist  derives 
income  not  by  selling  his  capital,  but  by  selling  the  flow  of  utilities 
which  come  from  his  capital  during  a  given  period  of  time.  The 
landowner  does  the  same  with  his  land.  The  following  outline  will 
indicate  the  relation  of  these  various  problems  to  the  general  prob- 
lem of  valuation.  For  convenience  the  flow  of  utilities  yielded  by 
the  various  factors  of  production  is  called  services. 

(Consumers'  goods 
r  Land 
l^  Producers'  goods  -!  Capital 
Valuation'  <  [  Laborers  (under  slaverj') 

f  Of  land  (yielding  rent) 
wOf  services-!  Of  capital  (yielding  interest) 
[^  Of  laborers  (earning  wages) 
257 


2  58  ELEMENTARY  ECONOMICS 

Why  productive  agents  are  desired.  The  reason  for  paying 
for  an  agent  of  production  is  that  it  helps  to  produce  something 
which  is  desirable.  Its  value  is  derived  from  that  of  its  products. 
If  its  product  has  a  high  value  the  productive  agent  is  likely  also 
to  have  a  high  value.  In  other  words,  it  will  give  its  possessor 
great  bargaining  power. 

When  several  things  have  to  be  combined  in  order  to  produce  a 
product,  these  things  are  called  factors  of  production.  The  pos- 
sessor of  one  factor  may  possess  greater  bargaining  power  than  the 
possessor  of  another  factor.  In  that  case  the  one  will  get  a  larger 
share  of  the  total  value  of  the  product  than  the  other.  Another 
way  of  saying  the  same  thing  is  that  one  factor  has  more  value 
than  the  other. 

Why  one  productive  agent  commands  a  larger  share  of  the 
product  than  another.  Since  a  factor  of  production  has  value 
only  because  of  its  product,  if  one  factor  has  more  value  than 
another  it  must  be  because  it  is  believed  that  it  contributes  more 
value  to  the  product  than  the  other  contributes.  Why  this  belief 
exists  is  one  of  the  most  difficult  of  all  economic  problems.  The 
student  is  requested  to  study  the  following  analysis  very  carefully 
and  without  prejudice. 

Need  of  a  proper  balance.  In  Chapter  XV  we  learned  of  the 
importance  of  a  proper  balance  among  the  different  factors  or 
substances  that  have  to  be  combined  in  order  to  get  a  desirable 
result.  This  is  as  true  when  the  desired  result  is  the  production 
of  a  commodity  as  when  it  is  the  preparation  of  a  dish  or  any 
article  of  consumption.  To  choose  a  single  example  out  of  many  : 
when  there  is  an  abundance  of  cranberries  and  a  scarcity  of  sugar 
it  is  difficult  to  produce  satisfactory  cranberry  sauce  in  large 
quantities,  in  spite  of  the  abundance  of  cranberries.  People  will 
desire  more  sugar  than  they  have,  and  desire  it  intensely,  while 
they  will  not  desire  more  cranberries  so  very  intensely  when  they 
cannot  get  sugar  to  go  with  them.  This  intense  desire  for  more 
sugar,  and  the  lack  of  an  intense  desire  for  more  cranberries,  will 
make  it  easy  to  sell  sugar  and  hard  to  sell  cranberries.  Those 
who  have  sugar  to  sell  are  in  a  favorable  position  for  bargaining, 


THE  LAW  OF  VARIABLE  PROPORTIONS         259 

while  those  who  have  cranberries  to  sell  are  in  an  unfavorable 
position.  Temporarily,  at  least,  sugar  will  command  a  larger 
share  of  the  value  of  the  sauce,  and  cranberries  a  smaller  share, 
than  would  be  the  case  if  sugar  were  more  abundant  and  cran- 
berries scarcer. 

But  labor,  land,  and  tools  have  to  be  combined  for  the  produc- 
tion of  most  commodities  as  certainly  as  sugar  and  cranberries 
have  to  be  combined  in  the  production  of  cranberry  sauce.  If 
these  factors  of  production  are  not  found  in  well-balanced  pro- 
portions, one  class  is  likely  to  be  more  favorably  situated  than 
another  with  respect  to  bargaining.  Again,  many  different  kinds 
of  labor  and  many  different  kinds  of  tools  frequently  have  to  be 
combined  in  order  to  get  a  product.  If  these  different  kinds  are 
not  found  in  well-balanced  proportion,  there  is  as  certain  to  be 
a  difference  of  prosperity  as  there  is  between  the  sellers  of  sugar 
and  the  sellers  of  cranberries  in  a  time  of  sugar  shortage. 

No  matter  how  many  hodcarriers  and  brickmakers  there  are 
in  a  given  neighborhood,  if  there  is  a  scarcity  of  brick  masons, 
not  many  brick  houses  can  be  built.  It  would  not  add  much  to 
the  production  of  brick  houses  to  produce  a  lot  of  new  bricks  or 
to  bring  in  a  number  of  additional  hodcarriers.  However  in- 
tensely men  desired  new  brick  houses,  there  would  not  be  a  very 
intense  desire  for  hodcarriers  or  brickmakers,  but  there  would 
be  an  intense  desire  for  brick  masons.  It  is  easy  to  see  that 
under  these  conditions  brick  masons  would  be  more  prosperous 
than  hodcarriers  or  brickmakers ;  in  other  words,  masons  would 
command  a  larger  share  and  the  others  a  smaller  share  of  the  total 
value  of  a  house  built  by  the  joint  labor  of  all  than  would  be  the 
case  if  brick  masons  were  not  so  scarce. 

This  is  a  principle  of  the  very  widest  application.  It  applies 
not  simply  to  the  preparation  of  a  dish  in  which  the  ingredient 
that  is  scarce  and  hard  to  get  will  be  eagerly  sought  after 
while  the  one  that  is  abundant  and  easy  to  get  will  not ;  it  applies 
equally  to  the  combination  of  different  kinds  of  labor,  different 
kinds  of  tools  and  machines,  to  the  combination  of  labor  and 
capital  and  of  labor  and  land.   In  everi'^  combination  of  factors  of 


2  6o  ELEMENTARY  ECONOMICS 

production  the  factor  that  is  scarce  and  hard  to  find  in  suf- 
ficient quantity  to  balance  the  other  factors  will  be  eagerly  sought 
after.  They  who  possess  it  will  have  great  bargaining  power 
in  any  free  country.  On  the  other  hand,  the  factor  which  is  over- 
abundant, which  is  easy  to  find  in  quantities  greater  than  neces- 
sary to  balance  the  other  factors,  will  not  be  eagerly  sought  after. 
They  who  possess  this  factor  will  have  little  bargaining  power. 
They  must  seek  for  buyers  and  take  what  they  can  get. 

These  results  are  unavoidable  so  long  as  we  are  in  a  country 
where  things  are  done  by  voluntary  agreement  or  where  free  bar- 
gaining exists.  We  must  submit  to  it  or  else  do  away  with  the 
system  of  voluntary  agreem.ent  and  substitute  a  system  of  author- 
ity, such  as  exists  in  a  great  military  organization. 

This  does  not  mean,  however,  that  there  is  no  cure  for  poverty 
or  for  inequalities  in  prosperity.  It  is  possible  so  to  equalize 
bargaining  power,  by  balancing  the  factors  of  production,  as  to 
diffuse  prosperity  among  all  classes  and  still  leave  them  free 
men.  How  this  can  be  done  will  be  shown  in  the  last  chapter 
of  this  book. 

EXERCISES 

1.  Upon  what  does  the  bargaining  power  of  a  man  or  a  class 
mainly  depend,  their  shrewdness  as  traders  or  the  conditions  of  the 
market  ? 

2.  Why  are  factors  of  production  desired? 

3.  What  determines  how  much  they  are  desired? 

4.  What  is  meant  by  a  balance  among  the  factors  of  production  ? 

5.  When  one  of  the  necessary  ingredients  of  a  dish  is  scarce  and 
hard  to  find  and  another  is  abundant  and  easy  to  find,  which  is  likely 
to  sell  more  readily? 

6.  Who  is  likely  to  get  the  larger  share  of  the  value  of  the  dish, 
the  one  who  supplies  the  scarce  ingredient  or  the  one  who  supplies  the 
abundant  ingredient  ? 

7.  Could  it  be  otherwise  in  a  free  country? 

8.  When  both  ingredients  are  equally  scarce  or  equally  abundant, 
relatively  to  the  need  for  them,  would  there  be  any  great  difference  in 
their  salability  ? 


CHAPTER  XXX 
THE  GENERAL  NATURE  OF  THE  WAGE  QUESTION 

How  intensely  is  a  man's  labor  desired  ?  The  price  of  labor, 
like  the  price  of  commodities,  depends  upon  how  much  it  is  desired 
in  comparison  with  other  things.  The  question  is  not  how  in- 
tense is  the  need  or  desire  for  labor  in  general,  nor  how  great 
would  be  the  loss  if  all  labor  were  wiped  out  of  existence.  The 
question  is  how  intense  is  the  need  for  the  labor  of  the  individual 
men  who  are  looking  for  work. 

The  need  for  more  labor  rather  than  the  absolute  need  for 
labor.  It  may  be  true  that  if  there  were  no  labor  of  a  given  class, 
say  that  of  ditch  diggers,  the  community  would  suffer  terribly. 
Nevertheless,  there  may  be  so  many  ditch  diggers  that  the  addi- 
tion of  one  to  the  total  number  would  add  very  little  to,  and  the 
subtraction  of  one  would  subtract  very  little  from,  the  well-being 
of  the  community.  The  indispensable  man,  like  the  indispensable 
commodity,  commands  the  high  price.  The  man  who  can  be  easily 
spared,  like  the  superfluous  commodity,  brings  the  low  price. 

The  functional  theory  of  wages.  This  may  be  called  the 
functional  theory  of  wages,  and  it  forms  a  part  of  the  functional 
theory  of  value  which  was  outlined  in  a  previous  chapter.  The 
function  of  a  high  price,  in  the  economy  of  the  nation,  is  to  call 
into  existence  a  larger  supply  of  the  thing  for  which  it  is  offered. 
The  function  of  a  low  price  is  to  discourage  the  production  and 
reduce  the  supply  of  the  thing  for  which  it  is  offered.  If  a  larger 
supply  is  desired  or  needed,  a  high  price  is  the  means  of  getting 
it.  If  a  larger  supply  is  not  desired  or  needed,  a  low  price  is  the 
means  of  checking,  limiting,  or  reducing  the  supply.  Find  out,  in 
any  given  case,  how  much  better  off  a  community  would  be,  or 
thinks  it  would  be  if  it  had  more  of  a  given  thing  than  it  now  has, 

261 


2  62  ELEMENTARY  ECONOMICS 

and  you  have  a  fair  measure  of  the  reward  which  it  could  afford, 
or  thinks  it  could  afford,  to  pay  in  order  to  get  more. 

There  may  be  members  of  the  community  who  desire  intensely 
to  possess  a  certain  commodity  or  to  hire  a  certain  kind  of  labor, 
but  who  have  not  the  wherewithal  to  purchase  or  hire  it.  They 
will  therefore  have  little  influence  on  the  price  or  the  wages.  This 
impecunious  condition  may  be  due  to  the  fact  that  others  have 
no  great  desire  for  the  labor  or  the  products  of  the  persons  in 
question.  In  that  case  the  community  does  not  value  their  services 
very  highly,  and  therefore  their  desires  have  little  influence  on  the 
market  for  other  things  or  other  services. 

Productive  labor  is  wanted  because  of  its  product.  Our  next 
task  is  to  find  out  what  determines  how  much  the  labor  of  any 
particular  man  or  group  of  men  is  wanted.  In  the  simplest  pos- 
sible case — that  of  a  laborer  who,  without  any  help  from  any- 
body else,  produces  a  complete  article — his  labor  is  needed  just 
as  much  as  and  no  more  than  the  article  itself  is  needed.  The 
price  of  the  article,  then,  is  his  reward.  If  he  is  not  satisfied  with 
his  income  he  must  find  fault  with  the  price  which  the  consumer 
pays  for  the  product,  for  he  gets  the  whole  price.  This,  however, 
is  a  case  so  simple  as  to  be  very  exceptional.  Very  few  finished 
products  are  produced  by  the  labor  of  a  single  person.  One  who 
goes  out  into  the  woods  and  gathers  nuts  or  berries,  carries  them 
in  vessels  which  he  has  himself  improvised,  and  sells  them  directly 
to  consumers  may  come  under  this  class. 

Goods  generally  produced  by  the  joint  labor  of  a  number 
of  persons.  We  are  sometimes  told  that  mbst  goods  are  socially 
produced.  It  would  be  better  to  say  that  most  goods  are  produced 
by  the  joint  efforts  of  several  persons.  The  total  reward  which 
can  go  to  all  of  them  cannot  in  the  long  run  exceed  the  total  value 
of  the  finished  product.  This  must  be  divided  among  all  those 
who  have  taken  part  in  its  production.  The  price  of  the  loaf  of 
bread  must  reward  all  those  who  have  had  any  part  in  its  pro- 
duction, including  the  baker,  the  miller,  the  various  transportation 
agencies,  and  the  farmer,  as  well  as  the  manufacturers  of  the 
farmer's,  the  baker's,  and  the  miller's  tools,  and  so  on  back  to  the 


GENERAL  NATURE  OF  THE  WAGE  QUESTION     263 

lumbermen  and  the  miners  who  extracted  the  raw  material  out  of 
which  the  tools  were  made. 

The  successive  division  of  labor  does  not  create  a  very  diffi- 
cult problem  in  distribution.  Division  of  labor  is  of  two  kinds: 
contemporaneous  and  successive.  We  have  the  successive  division 
of  labor  among  the  farmer,  the  miller,  the  railroad,  and  the  baker, 
since,  one  after  the  other,  they  work  upon  the  same  material.  We 
have  an  example  of  the  contemporaneous  division  of  labor  in  the 
case  of  the  mill  owner  and  his  employees  of  various  kinds,  the  rail- 
road company  and  its  employees,  the  farmer  and  his  hired  men,  and 
so  on.  The  problem  of  distributing  the  price  of  the  finished  prod- 
uct among  those  who  work  upon  the  raw  material  in  regular  suc- 
cession is  simply  a  problem  in  the  price  of  commodities.  Thus  the 
reward  of  the  farming  group  comes  to  them  in  the  form  of  the  price 
of  wheat.  This  price  must  then  be  distributed  among  the  contem- 
poraneous v.orkers  on  the  farm  ;  that  is,  the  farmer  himself  and  his 
hired  men.  The  difference  between  the  price  of  wheat  and  the  price 
of  flour  and  its  by-products  must  furnish  the  reward  for  the  milling 
group,  and  the  difference  between  the  price  of  flour  and  the  price 
of  bread  must  furnish  the  total  reward  for  the  baking  group. 

All  this  is  fairly  simple  and  leads  to  no  serious  social  problem. 
The  commodity  market  is  supposed  to  take  care  of  it,  and  social 
reformers  in  general  have  not  exercised  themselves  to  any  great 
extent  on  the  subject.  Occasionally,  of  course,  someone  is  ac- 
cused of  cornering  wheat  or  manipulating  the  price  of  flour. 

The  division  of  the  product  among  contemporaneous  workers 
the  difficult  problem.  The  great  social  problem  of  today,  so  far 
as  it  relates  to  the  distribution  of  wealth,  is  the  problem  of  dis- 
tributing the  price  of  the  product  among  the  contemporaneous 
workers.  Of  the  total  price  of  wheat,  how  much  should  go  to 
the  landowner  (if  he  is  a  different  man  from  the  farmer),  how 
much  to  the  farmer,  how  much  to  the  laborer,  how  much  to  the 
capitalist  (if  he  is  a  different  man  from  the  farmer)?  Or,  again, 
of  the  total  spread  between  the  price  of  wheat  and  the  price  of 
flour,  which  furnishes  the  total  reward  to  the  milling  group,  how 
much  goes  to  the  owner  of  the  mill  site,  how  much  to  the  manager, 


2  64  ELEMENTARY  ECONOMICS 

and  how  much  to  the  various  types  of  laborers?  And  so  on 
through  the  transportation  groups  and  the  baking  groups,  the  diffi- 
cult problem  is  always  that  of  the  distribution  of  the  total  earnings 
of  the  group  among  the  contemporaneous  workers  within  it. 

The  law  of  variable  proportions  again.  Not  much  headway 
can  ever  be  made  in  the  study  of  this  problem  unless  we  hold  care- 
fully in  mind  the  law  of  variable  proportions  as  explained  in  the 
last  chapter.  When  it  is  suggested,  for  example,  that  each  factor 
of  production  should  be  paid  for  in  proportion  to  its  contribution 
to  the  product,  any  student  who  does  not  understand  the  law  of 
variable  proportions  is  likely  to  say  that  there  is  no  way  of  finding 
out  what  each  factor  contributes.  He  will  say,  for  example,  that 
it  is  like  trying  to  find  out  how  much  of  the  welding  is  done  by  the 
anvil  and  how  much  by  the  hammer,  or  how  much  of  the  cutting 
by  the  upper  and  how  much  by  the  lower  blade  of  the  scissors. 

To  use  this  comparison  is  to  show  that  one  does  not  understand 
the  problem.  If  one  blade  of  the  scissors  were  a  little  longer  than 
the  other,  it  would  not  require  any  so-called  metaphysical  or 
theoretical  reasoning  to  see  that  the  scissors  might  be  improved  by 
lengthening  the  shorter  blade.  If  two  workmen  were  to  offer  their 
services,  one  to  lengthen  the  longer  blade  and  one  to  lengthen  the 
shorter  blade,  it  would  not  take  much  of  a  philosopher  to  decide 
which  workman  it  would  be  better  to  hire.  The  workman  who 
would  lengthen  the  shorter  blade  would  add  somewhat  more  to 
the  cutting  power  of  the  scissors  than  the  workman  who  would 
lengthen  the  longer  blade. 

How  important  is  it  that  we  have  more  of  a  certain  thing  ? 
Most  economic  problems,  as  pointed  out  many  times  already  in 
this  volume,  relate  to  the  problems  of  more  or  less,  of  improve- 
ment or  deterioration,  of  readjustment  of  existing  equipment, 
organization,  etc.  If,  for  example,  a  farmer  found  that  he  could 
increase  his  crop  more  by  having  extra  help  than  by  having  more 
land,  he  would  be  more  likely  to  offer  wages  to  someone  than  to 
offer  rent  to  someone  else.  If  farmers  generally  felt  that  way 
about  it,  wages  would  be  high  and  rent  low.  Under  the  opposite 
conditions  rent  would  be  high  and  wages  low. 


GENEFLAL  NATURE  OF  THE  WAGE  QUESTION     265 

Under  the  law  of  variable  proportions,  or  that  special  phase  of 
it  known  as  the  law  of  diminishing  returns  from  land,  it  is  ac- 
tually found  that  in  a  community  where  there  is  an  abundance  of 
good  land  but  a  scarcity  of  labor  to  work  it,  the  addition  of  one 
or  more  laborers  to  the  existing  number  will  make  a  considerable 
difference  in  the  crop.  That  is  a  sufficient  reason  for  paying  high 
wages  to  labor.  Additional  laborers  are  very  much  needed ;  the 
agricultural  situation  would  be  very  much  improved  by  having 
more  laborers  and  would  be  very  much  injured  if  any  were  lost. 
The  question  of  more  laborers  or  fewer  laborers  is  one  of  con- 
siderable importance. 

On  the  other  hand,  where  land  is  so  abundant  and  laborers 
so  few  that  it  is  difficult  to  cultivate  the  existing  land,  it  would 
not  be  of  much  advantage  to  production  to  have  a  few  more  acres, 
nor  much  of  a  disadvantage  to  have  a  few  less.  The  question  of 
more  or  less  is  not,  in  this  case,  very  important.  This  is  the 
question  which  presents  itself  to  the  practical  farmers.  The  ques- 
tion as  to  which  is  absolutely  more  important,  land  or  labor,  is 
a  question  which  occurs  only  to  armchair  philosophers.  This 
would  be  in  all  respects  like  the  question  as  to  which  does  more  of 
the  cutting,  the  upper  or  the  lower  blade  of  the  scissors. 

Shares  generally  divided  into  wages,  rent,  interest,  and 
profit.  It  simplifies  the  problem  somewhat  to  classify  those  who 
take  part  in  the  contemporaneous  division  of  labor  according  to 
the  functions  which  they  are  supposed  to  perform.  It  is  customary 
to  divide  them  into  four  main  classes.  The  first  class  is  made  up  of 
the  laborers,  who  work  either  with  their  hands  or  with  their  heads 
and  receive  their  share  in  the  form  of  wages  or  salaries  (for  the 
sake  of  simplicity  salaries  are,  in  this  chapter,  included  under 
wages) ;  the  second  class  is  made  up  of  the  landowners,  who  own 
the  land  and  receive  rent ;  the  third  class  is  made  up  of  the 
capitalists,  who  supply  the  capital  and  receive  a  reward  in  the 
form  of  interest ;  and  the  fourth  class  is  made  up  of  the  inde- 
pendent business  men,  who  undertake  to  assemble  all  the  other 
factors, — who  take  the  chief  risks  of  the  enterprise  and  receive 
whatever  is  left  over  after  all  the  others  are  paid,  and  call  it  profits. 


266  ELEMENTARY  ECONOMICS 

We  may  say  in  general  that  when  one  factor  of  production  is 
oversupplied  in  proportion  to  the  others  which  need  to  be  com- 
bined with  it,  the  question  of  getting  more  of  it,  or  even  of 
maintaining  the  existing  supply,  becomes  unimportant.  Accord- 
ingly not  much  will  be  paid  in  order  to  get  more  of  it,  or  even 
to  hold  the  existing  supply.  But  when  any  factor  is  undersupplied 
in  proportion  to  the  others  which  have  to  be  combined  with  it, 
the  question  of  getting  more  of  it,  or  of  holding  the  existing 
supply,  becomes  very  important.  Accordingly  a  high  price  will 
be  offered  for  it. 

This  principle  applies  not  simply  to  land,  labor,  and  capital,  but 
to  the  different  kinds  of  each.  If  there  is  a  scarcity  of  skilled  labor 
in  proportion  to  the  unskilled  labor  which  has  to  be  combined  with 
it,  it  becomes  very  important  to  get  more  skilled  labor  or  at  least 
to  keep  some  of  the  existing  supply  from  going  elsewhere.  In  that 
case  a  high  wage  will  be  offered  for  skilled  labor.  Under  the  same 
conditions  there  is,  of  course,  a  large  supply  of  unskilled  labor  in 
proportion  to  the  skilled.  It  is  therefore  not  very  important  that 
there  should  be  more  unskilled  labor,  nor  even  that  the  existing 
supply  should  be  kept  from  diminishing.  Not  much  is  likely  to  be 
paid,  under  such  conditions,  for  unskilled  labor. 

The  next  question  is,  What  determines  the  relative  supply  of 
the  various  factors  of  production? 

EXERCISES 

1.  What,  in  the  simplest  form  of  statement,  determines  how  much 
will  be  paid  for  a  man's  labor? 

2.  If  more  laborers  are  needed  than  are  offering  to  work  at  exist- 
ing wages,  how  can  more  be  secured? 

3.  Why  does  anyone  desiie  to  hire  labor? 

4.  How  may  the  desire  to  hire  labor  be  increased  ? 

5.  Where  two  or  more  kinds  of  labor  have  to  combine  in  order  to 
produce  something,  why  does  anybody  find  it  necessary  to  pay  higher 
wages  to  one  kind  than  to  another? 

6.  Would  it  be  necessary  if  all  kinds  of  labor  were  equally 
abundant  ? 


GENERAL  NATURE  OF  THE  WAGE  QUESTION     267 

7.  How  is  it  determined  what  share  of  the  price  of  bread  goes  to 
the  farmer,  the  miller,  and  the  baker  ? 

8.  Is  this  the  same  question  as  that  of  determining  what  share  of 
the  price  of  wheat  goes  to  the  farmer  and  what  share  to  the  farm 
hand? 

9.  When  labor  is  scarce  and  land  abundant  in  a  farming  community, 
how  would  it  affect  the  total  crop  if  a  few  more  good  farm  hands  were 
to  come  ?  How  would  it  affect  the  crop  if  a  few  more  acres  were 
opened  up  to  cultivation?  Do  these  questions  have  anything  to  do 
with  the  wages  of  labor  and  the  rent  of  land  ? 

10.  What    are    the   principal    shares   into   which    the   products    of 
industry  are   divided? 


CHAPTER  XXXI 
WHAT  DETERMINES  THE  RATE  OF  WAGES? 

Causes  of  differences  of  wages  in  different  occupations.  Let 
us  consider,  first,  the  causes  of  the  difference  of  wages  in  different 
occupations.  If  in  order  to  get  efficient  production  it  is  found 
necessary  to  have  a  high  degree  of  specialization,  many  different 
kinds  of  skill  will  be  found  in  the  same  establishment,  each  kind 
contributing  its  share  toward  the  production  of  the  same  product. 
Men  possessing  these  different  kinds  of  skill  will  be  needed  in 
slightly  variable  but  fairly  definite  proportions.  In  the  production 
of  cloth,  for  example,  spinners  and  weavers  will  be  needed  in  fairly 
definite  proportions.  If  by  any  accident  it  could  happen  that  for 
a  period  of  time  there  were  more  spinners  than  were  necessary  to 
supply  yarn  for  the  weavers,  the  value  or  importance  of  each  spin- 
ner would  be  considerably  reduced.  Under  these  conditions,  if 
they  could  exist,  it  would  be  literally  true  that  the  loss  of  a  few 
spinners  would  bring  little  loss  to  the  industry,  provided  the  re- 
maining spinners  could  supply  all  the  yarn  the  weavers  could 
use.  On  the  other  hand,  the  labor  of  each  weaver  would  be  of 
considerable  importance. 

Since  there  would  not  be  weavers  enough  to  use  all  the  yarn 
that  could  be  produced,  one  less  weaver  would  reduce  the  total  pro- 
duction of  cloth,  and  one  more  weaver  would  add  to  the  total 
production,  assuming  that  machinery  and  room  were  available. 
Under  these  conditions  there  would  grow  up  in  any  free  com- 
munity a  difference  in  wages  in  favor  of  the  weavers  and  against 
the  spinners.  This  would  be  called  the  law  of  supply  and  demand, 
but  this  law  rests  on  certain  fundamental  advantages  and  dis- 
advantages. The  addition  to  the  total  output  of  cloth  which  would 
result  from  an  increase  in  the  number  of  weavers  would  really  be 

268 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     269 

much  greater  than  the  addition  which  would  result  from  an  equal 
increase  in  the  number  of  spinners.  This  would  be  a  sufficient 
reason  why  a  higher  price  should  be  offered  for  the  labor  of  weavers 
than  for  that  of  spinners.  In  the  absence  of  compulsion  that 
would  be  the  only  way  of  attracting  more  weavers  and  fewer 
spinners. 

Of  course  this  condition  would  soon  correct  itself.  If  the  wages 
of  the  weavers  were  allowed  to  go  up  and  the  wages  of  the  spin- 
ners to  go  down,  some  of  the  spinners  would  have  an  excellent 
reason  for  changing  their  occupation.  If  they  could  not  easily  do 
so  the  oncoming  generation  of  laborers,  who  have  to  choose  be- 
tween the  occupation  of  weaver  and  that  of  spinner,  would  be 
attracted  into  the  one  where  the  wages  were  higher,  and  thus 
restore  the  equilibrium.  But  if  wages  were  not  allowed  to  read- 
just themselves  because  of  some  compulsion  on  the  part  of  the 
government  or  some  other  agenc}'^,  then  there  would  be  no  reason 
why  the  oncoming  generation  should  go  into  the  occupation  where 
they  were  most  needed.  Where  the  ordinary  processes  of  bargain- 
ing are  not  interfered  with,  wages  tend  to  be  high  in  those  oc- 
cupations where  more  men  are  needed,  and  needed  badly,  and 
low  in  those  occupations  where  there  is  no  great  need  for  more 
men.  The  function  of  these  differences  of  wages  is  to  restore  the 
equilibrium  between  different  occupations. 

Cost  of  acquiring  skill.  If  there  is  some  permanent  obstacle 
in  the  way  of  a  free  choice  of  occupations,  there  may  be  a  perma- 
nent difference  in  the  wages  in  different  occupations,  based  upon 
a  permanent  undersupply  of  labor  in  one  and  a  permanent  over- 
supply  in  another.  If,  for  example,  a  certain  occupation  requires 
a  kind  of  skill  which  is  not  widely  distributed  or  easily  acquired, 
whereas  another  occupation  requires  a  kind  of  skill  which  multi- 
tudes of  people  possess  or  can  easily  acquire,  there  is  likely  to  be 
a  permanent  undersupply  of  the  one  kind  of  labor  and  a  perma- 
nent oversupply,  at  least  relatively,  of  the  other.  The  cost  of 
training  or  the  difficulty  and  irksomeness  of  the  necessary  study 
and  practice  will  serve  to  limit  the  number  of  people  who  succeed 
in  entering  the  highly  skilled  occupations. 


2  70  ELEMENTARY  ECONOMICS 

In  this  respect  the  cost  of  acquiring  the  necessary  skill  acts  very 
much  as  the  cost  of  producing  a  commodity.  As  the  price  of  the 
commodity  must  be  high  enough  to  cover  the  cost,  so  the  wages  of 
labor  in  a  highly  skilled  occupation  must  be  high  enough  to  pay  the 
cost  of  acquiring  the  skill  or  to  overcome  whatever  disinclination 
there  may  be  to  the  preliminary  work  of  study  and  practice.  If 
this  cost  is  high  the  wages  must  be  correspondingly  high.  If  the 
cost  is  very  low,  so  that  practically  no  one  is  deterred  from  enter- 
ing the  occupation,  the  wages  will  be  correspondingly  low. 

Some  skill  is  absolutely  limited.  There  may,  however,  be 
certain  kinds  of  skill  which  are  so  scarce  as  to  be  almost  incapable 
of  being  increased.  Certain  kinds  of  work  may  require  a  man  of 
genius  rather  than  a  man  of  training,  but  in  most  cases  it  will  be 
found  to  be  a  matter  of  training.  An  indefinite  number  of  men 
could  be  trained  for  almost  any  occupation  if  the  wages  were 
only  high  enough  to  furnish  a  sufficient  inducement. 

This,  however,  will  depend  somewhat  upon  the  opportunities  for 
education  and  training.  Under  a  system  of  free  public  education 
the  cost  of  training  is  greatly  reduced  and  should  naturally  in- 
crease the  supply  of  highly  trained  labor.  Where  the  money  cost 
of  education  is  eliminated,  the  only  cost  remaining  is  the  irksome- 
ness  of  hard  study.  Those  to  whom  this  irksomeness  is  very  slight 
will  naturally  be  attracted  into  the  more  highly  paid  occupations. 

There  may,  however,  be  artificial  restrictions  in  the  way  of 
entering  certain  well-paid  occupations.  If  the  laborers  in  one  of 
those  occupations  where  apprenticeship  still  prevails  should  limit 
the  number  of  apprentices,  that  would  of  course  limit  the  number 
of  laborers  who  could  acquire  skill  enough  to  follow  the  occupation. 

In  other  cases  the  policy  of  the  closed  shop  might  be  carried  to 
such  an  extreme  as  to  reduce  the  supply  of  labor  in  the  given  oc- 
cupation and  thus  prevent  the  readjustment  of  the  labor  supply 
to  meet  the  demand.  The  tendency  of  freedom,  however,  is  to  en- 
courage the  automatic  readjustment  of  the  supply  of  labor  to  the 
demand. 

These  are  the  principal  factors  which  determine  the  excess  in 
wages  of  the  skilled   trades  and   occupations   and   the   learned 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      271 

professions  over  and  above  those  paid  in  what  are  known  as  the 
unskilled  occupations.  By  the  unskilled  occupations  are  meant, 
however,  those  which  require  a  kind  of  skill  which  practically 
everybody  can  acquire  without  much  special  study.  We  have, 
therefore,  the  problem  of  finding  out  what  determines  the  wages  of 
this  general  mass  of  unskilled  labor.  What  is  there  here  which  cor- 
responds to  the  cost  of  producing  a  commodity  or  to  the  cost  of 
acquiring  the  skill  required  in  one  of  the  well-paid  occupations? 
The  factors  of  cost  here  are,  first,  the  disinclination  to  work,  and, 
second,  the  disinclination  to  multiply. 

f  Fatigue 
Long  hours 

Loss  of  opportunity  for 
pleasure 

'  A  high  standard 

of  living 
I  Late  marriages 
[  Birth  control 
r  Women 
Exclusion  of-;  Children 

(^  Men  of  other  races 
Restriction  of  immigration 
Encouragement  of  emigration 

fWar 
,  Destruction  of  life  through  J  Pestilence 
[  Famine 
Rarity  of  genius 
Expenses  of  education 
In  the  skilled  trades -i  Disinclination  to  study 

Reduction  of  number  of  apprentices 
I.  Closed  shop 


Causes  of 
THE  Scarcity 
OF  Labor 


In  the  unskilled 
trades 


Disinclination 
to  work  be-- 
cause  of 


Disinclination  to  mul- 
tiply because  of 


Scarcity  of  unskilled  labor.  Among  the  vigorous  European 
and  American  stocks  the  disinclination  to  work  is  not  so  very 
great.  Nevertheless,  there  is  an  appreciable  quantity  of  labor 
which  is  chronically  withdrawn  from  productive  work  by  reason 
of  this  factor.  That  part  of  the  leisure  class  which  is  made  up 
of  people  who  have  inherited,  married,  or  otherwise  come  into 


2  72  ELEMENTARY  ECONOMICS 

possession  of  sufficient  wealth  to  enable  them  to  live  without  work, 
shows  this  disinclination  rather  clearly.  There  are  also  the  chronic 
loafers,  the  tramps,  and  the  nomadic  element  among  us,  who  show 
a  strong  disinclination  to  work. 

The  disinclination  to  multiply  is  unfortunately  strongest  among 
those  who  possess  the  most  forethought.  Those  who  live  only  in 
the  present  show  no  such  disinclination.  People  without  fore- 
thought marry  early  and  have  large  families.  Those,  however, 
who  look  to  the  future,  not  only  of  themselves  but  of  their 
children,  who  foresee  the  disadvantages  which  their  children  will 
suffer  if  they  are  insufficiently  nourished  or  inadequately  educated, 
generally  have  small  families.  Marriages  of  those  who  take 
thought  for  the  future  are  postponed  until  they  are  able  to  support 
and  educate  their  children. 

The  group  of  motives  and  factors  which  serve  to  hold  popu- 
lation in  check  are  generally  called  by  the  name  '^  standard  of 
living."  This  is  a  somewhat  technical  term  in  economics  and  re- 
quires some  careful  explanation. 

Meaning  of  "standard  of  living."  Technically  the  term 
"standard  of  living"  means  the  number  of  desires  which,  in 
the  average  person  of  the  class  in  question,  take  precedence 
over  that  group  of  desires  which  result  in  the  multiplication  of 
numbers.  For  purposes  of  discussion  we  will  call  the  latter  group 
of  desires  the  domestic  instincts.  When  the  domestic  instincts  act 
powerfully  and  without  opposing  motives  to  hold  them  in  check, 
the  individual  will  undertake  the  support  of  a  family  before  he  is 
assured  of  a  sufficient  income  to  satisfy  any  but  the  most  elemen- 
tary desires.  Under  these  conditions  he  is  said  to  have  a  low 
standard  of  living.  In  other  cases  a  large  number  of  other  desires 
take  precedence  over  the  domestic  instincts.  An  individual  of 
whom  that  can  be  said  will  not  marry  and  undertake  the  support 
of  a  family  until  he  feels  reasonably  certain  of  being  able  to  satisfy 
all  these  other  desires.  He  is  said  to  have  a  high  standard  of 
living  ;  that  is,  an  expensive  standard. 

If  we  can  imagine  a  community  to  which  immigrants  from  the 
outside  do  not  come,  and  in  which  the  average  unskilled  laborer 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      273 

has  a  high  standard  of  living,  we  shall  have  a  community  in  which 
the  average  laborer  will  not  marry  and  undertake  the  support  of 
a  family  until  he  is  sure  of  wages  high  enough  to  satisfy  a  large 
number  of  desires.  The  rate  of  multiplication  will  therefore  be 
slow,  the  oncoming  supply  of  labor  scarce,  and  in  the  succeeding 
generations  laborers  will  thus  be  able,  through  the  smaller  supply, 
to  continue  to  get  high  wages. 

The  law  of  population.  This  brings  us  to  the  great  law  of 
population,  which  has  generally  been  associated  with  the  name  of 
]\Ialthus.  The  law  which  iMalthus  worked  out  and  which  has 
never  been  successfully  refuted,  though  many  attempts  have  been 
made,  may  be  stated  briefly  as  follows: 

1.  Every  species  of  plant  and  animal  has  the  physiological 
power  to  multiply  faster  than  its  means  of  subsistence  will  permit. 
Subsistence  is  the  factor  which  actually  limits  numbers. 

2.  The  physiological  power  of  human  increase  is  also  so  great 
that  if  it  should  operate  without  moral  or  social  restraints  of  any 
kind,  it  would  carry  population  to  such  limits  that  vice  or  misery 
or  both  would  begin  to  thin  out  the  surplus  population  and  thus 
operate  as  a  check  upon  further  increase. 

3.  Owing  to  the  law  of  diminishing  returns,  a  larger  number 
of  people  cannot,  in  any  given  state  of  civilization  and  of  the  indus- 
trial arts,  be  so  well  provided  for  from  the  produce  of  a  restricted 
area  as  a  smaller  number  can. 

4.  The  postponement  of  marriage  until  a  comfortable  income 
is  assured  tends  to  keep  numbers  within  such  limits  as  can  be 
comfortably  maintained. 

Effect  of  immigration.  We  began  our  discussion  of  the 
standard  of  living  by  assuming  a  community  to  which  no  immi- 
grants came.  If  unskilled  immigrants  came  in  large  numbers,  it 
would  offset  the  results  of  a  high  standard  of  living.  However 
high  the  standard  of  living  of  the  native  laborers,  or  however 
strong  the  tendency  of  the  educational  and  social  system  to  raise 
the  standard  of  living,  if  large  numbers  of  immigrants  with  a  low 
standard  continue  to  come  in,  their  presence  will  keep  the  standard 
down  to  a  low  level.   At  any  rate  the  oversupply  of  unskilled 


2  74  ELEMENTARY  ECONOMICS 

labor  will  tend  to  keep  wages  down.  Their  coming  tends  to 
make  business  conditions  easier  for  men  who  need  to  employ  un- 
skilled labor,  but  to  make  conditions  very  much  harder  for  the 
unskilled  laborers  who  are  already  here.  If,  however,  the  im- 
migrants resemble  those  Americans  who  go  to  the  Philippine 
Islands  (that  is,  if  they  belong  to  the  skilled,  the  professional,  and 
the  employing  classes),  they  tend  to  make  conditions  easier  for 
the  unskilled  laborers  but  harder  for  the  skilled,  the  professional, 
and  the  employing  classes  who  are  already  there. 

Summary.  The  discussion  thus  far  may  be  summarized  as 
follows : 

1.  The  wages  of  any  person  will  depend  upon  how  much  his 
labor  is  desired.  The  wages  of  any  class  will  depend  upon  how  im- 
portant it  is  thought  to  be  that  there  should  be  more  laborers 
of  that  class,  or  that  there  should  not  be  any  less.  High  wages 
indicate  a  strong  desire  and  low  wages  a  weak  desire  to  have  more 
of  a  certain  kind  of  work  done. 

2.  Different  kinds  of  labor  usually  have  to  be  combined  in 
fairly  definite  but  somewhat  variable  proportions.  If  there  hap- 
pens to  be  more  of  a  certain  kind  than  will  combine  satisfactorily 
with  the  existing  supply  of  the  other  necessary  kinds,  the  over- 
supplied  kind  will  not  be  strongly  desired.  There  will  be  no  great 
need  for  more  of  it,  and  therefore  no  strong  reason  for  paying 
high  wages.  The  kind  of  labor,  however,  which  is  undersupplied 
will  be  much  more  needed.  There  will  be  a  strong  reason  for 
desiring  more  of  it,  and  the  only  way,  in  a  free  society,  to  get  more 
of  it  is  to  offer  high  wages. 

3.  Labor  which  requires  a  kind  of  skill  that  is  difficult  to 
acquire  will  usually  be  scarce,  relatively  to  the  need  for  it.  Wages 
must  be  high  enough  to  induce  men  to  make  the  necessary  effort 
in  order  to  fit  themselves  for  the  work. 

4.  Unskilled  labor  is  usually  abundant,  being  limited  only  by 
the  disinclination  to  work,  by  the  standard  of  living,  or  by  the 
cost  of  bringing  up  children.  Where  the  cost  is  high,  or  the  un- 
willingness great,  wages  must  be  high  enough  to  induce  men  to 
marry  and  bring  up  children.    When  the  cost  is  low  and  there 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      275 

is  very  little  unwillingness  to  overcome,  wages  may  be  low  because 
men  will  bring  up  children  on  very  low  wages  and  thus  keep 
the  supply  of  labor  intact. 

EXERCISES 

1.  Why  are  there  differences  of  wages  in  different  occupations? 

2.  Would  there  be  any  considerable  differences  if  every  man  were 
equally  well  fitted  for  every  occupation? 

3.  Would  there  be  any  considerable  differences  if  every  kind  of 
skill  could  be  acquired  with  equal  cost  ? 

4.  Do  you  consider  that  the  necessity  for  hard  study  is  a  kind  of 
cost?     Would  it  be  if  everybody  liked  hard  study? 

5.  What  are  the  chief  causes  of  the  scarcity  of  unskilled  labor? 

6.  What  are  the  chief  causes  of  the  scarcity  of  skilled  labor? 

7.  What  is  meant  by  the  standard  of  living? 

8.  What  limits  the  number  of  pine  trees  that  can  grow  ?  Is  it  the 
number  of  seeds,  or  the  means  on  which  pine  trees  subsist? 

9.  What  effect  has  immigration  on  the  wages  of  unskilled  labor 
(i)  when  the  immigrants  are  mainly  unskilled  laborers?  (2)  when 
the  immigrants  are  mainly  employers  ? 


CHAPTER  XXXII 
THE  ORGANIZATION  OF  LABORERS 

Comparative  advantages  in  bargaining.  It  has  long  been 
recognized  that  in  the  ordinary  bargaining  process  between  labor- 
ers and  their  employers,  the  laborers  are  usually  at  a  disadvan- 
tage. The  reasons  why  they  are  at  a  disadvantage  have  been 
variously  stated.  It  is  argued,  for  example,  that  the  capitalist  can 
wait  longer  than  the  laboring  man,  and  thus  wear  the  laboring 
man  out  and  force  him  to  give  in  and  accept  the  capitalist's  terms. 
The  capitalist,  it  is  said,  having  an  accumulation  of  wealth,  can 
live  on  that  accumulation. 

There  is  doubtless  something  in  this  argument,  though  it  is 
easy  to- exaggerate  it.  If  the  capitalist's  accumulation  is  in  the 
form  of  buildings  and  machinery,  it  is  difficult  to  see  how  he  can 
live  on  these  things.  He  might  borrow  money  on  the  basis  of  the 
security  which  they  furnish,  and  with  this  borrowed  money  buy 
consumers'  goods.  But  if  he  owned  his  own  house,  if  he  had  in- 
surance policies,  or  deposits  in  the  savings  bank,  he  would  have 
the  same  or  even  greater  waiting  power  than  he  has  when  he  owns 
capital  of  equal  commercial  value. 

It  is  therefore  frequently  argued  that  one  remedy  for  this  situ- 
ation is  for  the  laborer  himself,  as  far  as  possible,  to  acquire  his 
own  home,  life-insurance  policies,  and  deposits  in  savings  banks. 
This  would  help,  at  any  rate,  to  give  him  the  power  to  wait,  and 
would  thus  help  to  even  up  the  advantages  in  bargaining.  The 
objection  to  this  is  the  simple  observed  fact  that  the  laborers  have 
less  property  of  any  kind  than  their  employers ;  otherwise  they 
would  not  be  laborers.  This  being  the  fact,  it  does  not  help  much 
to  point  out  what  the  laborer  might  do  if  the  facts  were  otherwise. 

Another  reason  given  for  the  disadvantage  of  the  laborer  in  the 
bargaining  process  is  that  he  is  usually  less  skillful  in  the  matter 

276 


THE  ORGANIZATION  OF  LABORERS  277 

of  bargaining  than  his  employer.  His  expertness  is  more  likely  to 
consist  of  manual  skill  than  of  skill  in  bargaining.  The  inde- 
pendent business  man  is  peculiarly  a  bargaining  person.  He 
literally  bargains  for  everything.  If  he  borrows  capital,  if  he  rents 
land,  if  he  buys  raw  materials,  secures  transportation  rates,  and 
hires  labor,  and  also  organizes  a  selling  department, — every  part 
of  his  work  has  to  do  with  bargaining.  He  becomes,  therefore,  the 
bargainer  par  excellence.  Those  whose  expertness  lies  in  other 
directions  are  therefore  at  a  disadvantage  when  they  come  to  deal 
with  him.    This  argument  is  undoubtedly  correct  as  far  as  it  goes. 

Employers  are  few,  but  laborers  are  many.  The  third  fact, 
however,  which  usually  works  to  the  disadvantage  of  the  laborer 
and  the  advantage  of  the  employer  is  that  laborers  are  usually 
numerous  and  employers  few.  There  is  usually  more  competition 
among  laborers  for  jobs  than  among  employers  for  men.  Where- 
ever  this  fact  does  not  exist,  there  is  no  great  advantage  on  the 
part  of  the  employer. 

In  view  of  this  fact,  therefore,  the  fundamental  and  permanent 
remedy  for  the  laborer's  disadvantage  in  bargaining  must  be  such 
a  reduction  of  the  number  of  laborers  and  such  an  increase  of  the 
number  of  employers  as  to  give  the  laborer  at  least  an  equal  ad- 
vantage in  the  bargaining  process.  Anyone  who  can  become  an 
employer  instead  of  an  employee  can  thereby  increase  the  demand 
for  labor  and  reduce  the  supply. 

Collective  bargaining.  That  which  is  known  as  collective 
bargaining,  as  distinct  from  individual  bargaining,  is  supposed  to 
be  a  quick  remedy  for  the  immediate  ills  of  the  laboring  man. 
In  a  trade  where  laborers  are  oversupplied,  each  individual  laborer 
is  in  a  weak  position,  because  he  can  easily  be  spared.  Because 
there  is  a  superfluity  of  labor  his  place  can  easily  be  filled.  Under 
such  conditions  his  individual  bargaining  power  is  very  weak ;  he 
is  practically  compelled  to  take  whatever  terms  are  offered  to  him. 
His  kind  of  labor  as  a  whole,  however,  may  be  absolutely  indis- 
pensable. While  he  as  an  individual  could  be  spared  without 
much  inconvenience,  the  whole  body  of  laborers  in  his  trade  are 
absolutely  indispensable  when  considered  as  a  whole.    If  they 


2  78  ELEMENTARY  ECONOMICS 

were  all  to  stop  work,  business  would  have  to  stop ;  if  they  were 
all  to  emigrate,  the  whole  business  in  which  they  were  engaged 
would  be  destroyed. 

The  group  may  be  indispensable,  while  the  individual  could 
easily  be  spared.  The  fundamental  principle  involved  in  the 
trade-union  policy  of  the  present  is  the  substitution  of  the  indis- 
pensable group  for  the  superfluous  individual  as  a  bargaining  unit. 
Since  the  group  as  a  whole  is  indispensable  to  industry,  if  they 
can  bargain  as  a  whole  the  laborers  are  in  a  strong  position.  As 
a  group  they  cannot  be  spared.  The  difficulty,  however,  has  al- 
ways been  to  hold  the  group  together  and  get  them  to  bargain 
absolutely  as  an  indispensable  group  and  to  refrain  from  making 
individual  bargains  independently  of  group  action. 

The  trade  union.  This  underlying  principle  has  given  rise  to 
one  of  the  largest  social  movements  of  modem  times ;  namely,  the 
organization  of  laborers.  Several  types  of  organization,  however, 
have  entered  the  field,  and  there  is  still  some  rivalry  among  them. 
In  the  first  place,  there  is  the  trade  union  pure  and  simple ;  this 
is  an  organization  of  the  men  who  ply  the  same  trade ;  that  is, 
the  men  whose  work  is  of  the  same  kind.  The  Brotherhood  of 
Locomotive  Engineers  is  an  example  of  this  kind  of  organization. 

The  industrial  union.  In  the  second  place,  there  is  the  in- 
dustrial union,  which  includes  all  the  laborers  plying  various 
trades  who  are  engaged  in  the  same  general  line  of  industry.  The 
United  Mine  Workers  of  America  is  one  example  of  this  type  of 
organization ;  the  Brotherhood  of  Railroad  Trainmen  of  America, 
which  attempts  to  take  in  all  the  railroad  workers,  is  another. 

The  labor  union.  A  third  type  of  organization  is  what  may 
be  called  the  labor  union,  which  attempts  to  organize  all  laborers, 
of  whatever  trade  or  occupation  and  in  whatever  industry  they 
may  be  engaged.  The  Knights  of  Labor  had  an  organization  of 
this  type,  and  lately  the  Industrial  Workers  of  the  World  have 
attempted  a  similar  type  of  organization. 

The  federation  of  trade  unions.  The  trade  union  seems  in 
recent  years  to  have  been  somewhat  stronger  than  either  the  in- 
dustrial union  or  the  labor  union,  but  it  has  felt  the  need  of  some 


THE  ORGANIZATION  OF  LABORERS  279 

larger  and  more  nearly  universal  type  of  organization.  This  has 
been  secured  by  the  federation  of  trade  unions  into  a  national 
organization  known  as  the  American  Federation  of  Labor.  This 
type  of  organization  recognizes  that  each  trade  has  certain  special 
and  peculiar  interests  of  its  own  and  therefore  has  a  special  reason 
for  organizing  as  a  trade.  This  is  a  principle  which  seems  to  be 
ignored  by  the  labor  union  especially.  By  organizing  the  special 
and  peculiar  interests  of  each  trade  the  federation  becomes  stronger 
at  this  most  vital  point.  By  federating  the  different  trades  for  the 
furthering  of  the  interests  which  are  common  to  all,  it  becomes 
stronger  at  another  important  point ;  namely,  concerted  action  on 
a  nation-wide  scale. 

The  attempt  to  ignore  the  special  interests  of  each  trade  and  to 
unite  all  workers,  of  whatever  trade  or  industry,  into  one  universal, 
undifferentiated  organization,  has  had  certain  idealistic  features 
which  make  a  strong  appeal  to  men  of  idealistic  temperament. 
There  is  the  attempt  to  ignore  any  possible  rivalry  of  interests 
among  different  classes  of  laboring  men.  While  this  sounds  at- 
tractive, it  hardly  accords  with  the  observed  facts.  It  is  perhaps 
a  little  more  humanitarian  in  its  philosophy,  but  a  little  less  effec- 
tive in  its  methods  of  work.  It  might  be  compared  to  an  attempt 
to  create  a  unified  nation  by  ignoring  all  local  interests  and  in- 
ternal conflicts,  whereas  the  federation  idea  might  be  compared 
to  a  system  of  government  which  would  recognize  local  and  state 
interests  and  allow  a  certain  amount  of  self-government  to  the 
local  units,  but  which  would  unite  them  all  under  a  national 
government  for  the  carrying  out  of  national  aims. 

Necessity  of  controlling  the  supply  of  labor  in  its  own 
market.  Like  all  attempts  in  all  fields  to  bargain  to  better  advan- 
tage for  the  sale  of  either  a  commodity  or  a  service,  an  organi- 
zation of  laborers  must  get  control  of  the  supply  of  the  service 
which  it  is  trying  to  sell.  This  leads  to  the  policy  of  the  closed 
shop ;  that  is,  the  policy  under  which  none  but  members  of  the 
organization  are  to  be  employed  in  a  given  shop  or  series  of  shops. 

If  any  considerable  number  of  outsiders  are  permitted  to  work 
in  these  shops,  they  will  of  course  bargain  independently  and  be 


2  8o  ELEMENTARY  ECONOMICS 

in  a  weak  position.  That  very  fact  also  tends  to  weaken  the  power 
of  the  organization  in  the  bargaining  process.  Unless  the  organi- 
zation can  control  the  supply  of  labor  which  is  permitted  to  work 
in  a  given  trade, — can  withdraw  them  as  a  body  or  put  them  back 
as  a  body, — it  will  find  itself  unable  to  secure  advantageous  terms. 

The  closed  shop.  An  absolutely  closed  shop  is  very  difficult  to 
maintain  when  there  is  a  surplus  of  laborers  available  for  a  given 
occupation.  So  long,  for  example,  as  indefinite  numbers  of  foreign- 
born  laborers. can  be  had  for  the  recruiting  of  the  ranks  of  any 
trade,  nothing  but  the  most  drastic  measures  on  the  part  of  the 
organization  of  laborers  can  preserve  its  control. 

The  strike.  The  strike  has  become  one  of  the  drastic  methods 
through  which  an  organization  of  laborers  may  enforce  its  control 
over  the  labor  supply.  Theoretically  the  strike  is  merely  the  sus- 
pension of  work  by  the  laborers  of  a  given  trade  or  group  of 
trades.  If  there  were  no  waiting  list  and  no  available  mass  of 
laborers  from  which  to  fill  the  shops  which  they  have  vacated,  a 
mere  quiet  suspension  of  work  would  be  all  that  would  be  involved 
in  a  strike.  This,  however,  is  seldom  the  situation.  There  is 
generally  such  an  oversupply  of  labor,  especially  of  the  unskilled 
kinds,  as  to  force  the  strikers  to  do  something  else  besides  the 
mere  suspension  of  work.  They  must  manage  somehow  to  keep 
others  from  taking  their  places.  This  may  take  the  form  of  peace- 
ful picketing  and  persuasion ;  it  may  take  the  form  of  threats ; 
and,  in  extreme  cases,  it  may  even  take  the  form  of  violence  and 
terrorism. 

It  is  to  be  remembered,  however,  that  threats,  violence,  and 
terrorism  are  only  necessary,  even  from  the  laborer's  point  of 
view,  when  there  is  an  oversupply  of  labor  available  for  the  jobs 
of  the  strikers.  The  ultimate  cure  for  this  situation  is  that  which 
was  suggested  earlier  in  this  chapter, —  such  a  thinning  out  oi 
the  number  of  laborers,  especially  in  the  unskilled  occupations,  as 
to  reduce  the  number  of  men  to  an  approximate  equality  with  the 
number  of  jobs. 

Numbers  make  for  weakness  in  bargaining  but  for  strength 
in  fighting  and  voting.    One  large  fact  which  complicates  the 


THE  ORGANIZATION  OF  LABORERS  281 

whole  problem  of  the  organization  of  laborers  and  their  methods 
is  that  those  who,  because  of  their  numbers,  are  weak  in  the  bar- 
gaining process  become,  by  virtue  of  those  same  numbers,  strong 
in  the  making  of  public  opinion  and  in  the  election  of  candidates 
for  office.  Roughly  speaking,  one  may  say  that  the  more  people 
there  are  in  a  given  trade,  the  weaker  they  are  in  the  process  of 
individual  bargaining  but  the  stronger  they  are  in  making  public 
opinion  and  controlling  elections. 

When  a  numerous  class  realizes  that  its  numbers  count  against 
it  in  bargaining,  but  for  it  in  fighting  and  voting,  it  is  pretty  cer- 
tain, sooner  or  later,  to  try  to  win  back,  by  fighting  or  by  voting, 
what  it  has  lost  in  bargaining.  Therefore  there  are  two  very  good 
reasons  why  we  should  try  to  maintain  a  balanced  population. 

By  a  well-balanced  population  is  meant  a  population  in  which, 
among  other  things,  each  occupational  group  is  no  more  numerous 
than  is  necessary  to  combine  with  other  occupational  groups.  If, 
for  example,  there  are  no  more  spinners  than  are  needed  to  supply 
yarn  for  the  weavers,  no  more  of  both  than  are  required  to  com- 
bine satisfactorily  with  other  groups,  no  more  unskilled  laborers 
than  are  necessary  to  work  in  combination  with  the  skilled  labor- 
ers, no  more  of  both  than  are  necessary  to  work  in  combination 
with  salesmen,  accountants,  managers,  etc.,  the  population  is  well- 
balanced  so  far  as  these  groups  are  concerned.  When  this  is  the 
case,  no  group  will  be  at  a  disadvantage  in  the  bargaining  process. 
That  is  one  reason.  The  other  is  that  no  group  would  have  the 
motive  or  the  power  to  win  back,  by  fighting  or  by  voting,  what 
it  was  losing  by  bargaining.  Such  a  balancing  of  our  population 
would  eliminate  the  more  acute  phases  of  our  labor  problem. 

EXERCISES 

1.  Have  unskilled  laborers  or  their  employers  generally  had  the 
advantage  in  the  bargaining  process  ?    Why  ? 

2.  Is  the  laborer  at  a  disadvantage  when  labor  is  scarce  and  hard 
to  find? 

3.  Has  the  indispensable  man  usually  much  difficulty  in  getting 
good  wages  ? 


2  82  ELEMENTARY  ECONOMICS 

4.  How  about  the  superfluous  man? 

5.  What  are  some  of  the  methods  by  which  laborers  increase  their 
bargaining  power? 

6.  What  is  meant  by  collective  bargaining? 

7.  What  is  meant  by  the  trade  union?  by  the  industrial  union? 
by  the  labor  union  ? 

8.  How  would  you  describe  the  American  Federation  of  Labor? 

9.  What  is  meant  by  the  closed  shop? 

10.  What  is  a  strike? 

11.  Does  an  increase  in  the  number  of  laborers  strengthen  or  weaken 
their  bargaining  power?  How  does  it  affect  their  voting  and  their 
fighting  power? 

12.  How  would  a  decrease  in  the  number  of  laborers  affect  their 
bargaining  power  ?  How  would  it  affect  their  voting  or  their  fighting 
power  ? 


CHAPTER  XXXIII 
THE  RENT  OF  LAND 

Rent  the  price  paid  for  the  use  of  land.  The  rent  of  land 
originally  meant  the  price  paid  for  its  use  during  a  given  period 
of  time.  Its  meaning  is  now  extended  to  cover  the  income  which 
the  owner  derives  from  it,  whether  he  uses  it  himself  or  lets  it  out 
to  someone  else.  The  selling  price  of  land  is  the  price  paid  as  a 
lump  sum  for  its  permanent  possession,  which  includes  its  use 
through  all  future  time.  There  is  thus  a  very  close  connection 
between  the  value,  or  price,  of  land,  on  the  one  hand,  and  its 
rent,  on  the  other.  The  rent  is  the  value,  or  the  price,  of  the  flow 
of  utilities  which  it  yields  during  a  given  period  of  time,  such  as 
a  month  or  a  year.  Both  the  value  and  the  rent  of  land  come 
under  the  general  law  of  value. 

Why  rent  is  paid.  The  utility  of  land  is  of  various  kinds  and 
degrees.  In  some  cases  land  yields  its  utilities  directly,  and  thus 
is  a  consumers'  good  or  at  least  resembles  consumers'  goods  in 
this  respect.  Parks,  pleasure  grounds,  and  residence  sites  yield 
their  utilities  in  this  way  instead  of  yielding  tangible  products. 
In  other  cases  land  yields  its  utilities  indirectly ;  that  is,  it  pro- 
duces or  helps  to  produce  tangible  products  which  are  themselves 
useful. 

There  are  great  differences  in  the  utility  or  desirability  of  dif- 
ferent pieces  of  land,  whether  they  are  used  for  one  purpose  or  for 
another.  In  the  chapter  on  land  it  was  pointed  out  that  these 
differences  are  mainly  in  location  and  fertility.  The  other  qual- 
ities which  make  land  usable,  such  as  extension  and  solidity,  all 
land  possesses  in  equal  degree,  so  that  these  qualities  do  not  make 
one  piece  more  desirable  than  another ;  but  in  the  qualities  of 
location  and  fertility  there  are  great  differences,  and  these  dif- 
ferences powerfully  affect  its  desirability  and  its  value. 

283 


284  ELEMENTARY  ECONOMICS 

Differences  in  the  desirability  of  land.  The  problem  of  rent 
may  be  approached  in  several  ways.  In  the  first  place,  we  may 
concentrate  our  attention  on  the  differences  in  rent  or  the  dif- 
ferences in  the  desirability  of  different  pieces  of  land.  There  is 
always  land  somewhere  the  use  of  which  can  be  had  free  of 
charge.  Nevertheless,  men  will  be  found  paying  high  rents  for 
other  land  which  is  more  desirable  than  that  which  can  be  had  for 
nothing.  The  fact  that  it  is  more  desirable  than  the  free  land  is 
what  makes  it  command  a  rent.  In  the  case  of  land  which  is 
useful  for  production  only,  its  desirability  is  of  course  determined 
by  its  productivity.  He  who  secures  the  use  of  a  superior  piece 
of  land  can  either  produce  more  at  the  same  cost  than  would  be 
possible  on  the  kind  of  land  which  is  free  or  he  can  produce  the 
same  amount  at  lower  cost.  This  difference  in  productivity  gives 
its  owner  a  rent  when  he  cultivates  or  uses  it  himself  and  enables 
a  tenant  to  pay  rent  in  case  the  land  is  worked  by  a  tenant. 

Location  as  an  element  in  desirability.  That  the  location  of 
a  piece  of  land  will  affect  its  productivity  will  be  clear  to  anyone 
who  will  consider  that  the  cost  of  transporting  goods  to  market  is 
a  part  of  the  cost  of  production.  If  one  farm  is  so  badly  located 
with  respect  to  railroads  and  markets  that  it  costs  ten  cents  a 
bushel  to  haul  the  wheat  to  the  nearest  railroad,  while  another 
farm  is  so  well  located  that  the  hauling  costs  only  two  cents  a 
bushel,  it  is  evident  that  if  the  two  farms  are  equally  fertile  the 
former  will  be  worth  considerably  less  than  the  latter. 

If  land  were  so  abundant  that  the  badly  situated  farm  in  the 
above  illustration  and  other  land  equally  desirable  could  be  had 
rent  free,  and  if  it  were  the  most  desirable  land  which  could  be 
had  free,  then  land  of  this  type  might  be  called  marginal  land,  or 
land  on  the  margin  of  cultivation.  By  "marginal  land"  is  meant 
land  which,  under  the  conditions  of  the  market,  men  would  be  in- 
duced to  cultivate  if  it  cost  them  nothing,  but  which  they  would 
abandon  and  leave  unused  if  they  were  required  to  pay  even  the 
lowest  conceivable  rent  for  its  use. 

The  margin  of  cultivation.  Aside  from  the  productivity  of 
the  land,  two  other  factors  help  to  determine  the  margin  of 


THE  RENT  OF  LAND  285 

cultivation.  These  are  the  demand  for  products  and  the  demand 
for  labor,  or  the  opportunities  for  the  ehiployment  of  labor.  An 
increase  in  the  demand  for  products  will  generally  bring  land  into 
cultivation  which  would  otherwise  have  remained  idle,  whereas  a 
decrease  in  the  demand  for  products  will  cause  some  poor  land 
to  be  abandoned  which  would  otherwise  have  remained  in  use. 
The  margin  of  cultivation  may  change,  however,  for  other  reasons. 
When  the  prairies  of  the  West  were  brought  into  cultivation  the 
margin  was  extended  in  that  direction,  but  this  threw  so  many 
products  on  the  market  that  some  of  the  less  productive  lands  of 
New  England  could  no  longer  be  advantageously  cultivated.  Much 
of  this  land  was  abandoned,  and  the  margin  of  cultivation  was 
contracted  in  this  section.  The  extension  of  the  margin  on  the 
western  frontier  and  its  contraction  on  the  rocky  hillsides  of  New 
England  tended  to  counteract  one  another.  There  was,  however, 
at  the  same  time  a  growing  demand  for  products,  so  that  the  ex- 
pansion in  one  direction  more  than  made  up  for  the  contraction 
in  the  other.  In  other  words,  the  total  production  actually  in- 
creased, despite  the  diminution  on  some  of  the  New  England  farms. 
Factors  which  extend  the  margin  of  cultivation.  An  increase 
in  the  supply  of  labor*  which  is  seeking  employment,  unless  coun- 
teracted by  a  corresponding  increase  in  the  demand  for  it  else- 
where, will  generally  extend  the  margin  of  cultivation  and  cause 
land  to  be  cultivated  which  would  otherwise  have  remained  idle. 
This  problem  may  be  approached  from  two  points  of  view.  In  the 
first  place,  idle  land  may  be  regarded  as  an  opportunity  for  idle 
men.  When  the  supply  of  labor  increases  faster  than  the  demand 
for  it,  the  number  of  idle  men  increases.  Some  of  these  idle  men 
are  then  crowded  out  onto  the  idle  land.  Even  if  they  are  not 
actually  thrown  out  of  work,  the  results  are  much  the  same.  There 
is  always  a  current  of  migration  from  the  farms  to  the  towns. 
When  the  labor  market  in  the  towns  is  overcrowded,  country  boys 
find  fewer  inducements  to  leave  the  country.  Therefore  they  must 
perforce  remain  on  the  farms  and  cultivate  the  land.  \\Tien  larger 
inducements  are  offered  in  the  towns,  more  of  them  leave  the 
farms  and  less  land  can  then  be  cultivated. 


2  86  ELEMENTARY  ECONOMICS 

Another  way  of  approaching  this  problem  is  by  considering  the 
wages  of  farm  labor.  When  farm  labor  can  be  had  at  a  low  cost, 
some  land  can  be  cultivated  profitably  which  could  not  be  if  the 
same  kind  of  labor  cost  more.  Wherever  farm  labor  is  cheap  we 
actually  find  that  there  is  little  land  going  to  waste  except  the 
very  poorest.  Where  farm  labor  is  expensive  and  hard  to  find 
we  actually  find  fairly  good  land  going  to  waste.  Only  the  best 
land  can  be  profitably  cultivated  by  expensive  labor.  It  must  be 
remembered,  however,  that  labor  is  not  necessarily  expensive 
merely  because  wages  are  high.  Very  efficient  labor  may  be  cheap 
even  though  it  is  paid  high  wages,  and  very  inefficient  labor  may 
be  expensive  even  though  it  works  for  low  wages.  With  this  ex- 
planation it  ought  to  be  clear  that,  with  a  given  demand  for  farm 
products,  poorer  land  can  be  cultivated  if  labor  is  abundant  and 
cheap  than  would  be  profitable  if  it  were  scarce  and  dear. 

Different  grades  of  land.  A  partial  illustration  of  the  doctrine 
of  rent  can  be  found  in  a  study  of  the  following  table  and  the 
explanation  which  follows  it.  It  is  only  a  partial  explanation, 
however,  because  it  omits  the  law  of  diminishing  returns.  This  lack 
will  be  corrected  in  a  later  explanation. 

Grade  A,  yielding  looo  units  of  product  to  loo  units  of  labor. 
Grade  B,  yielding  900  units  of  product  to  100  units  of  labor. 
Grade  C,  yielding  800  units  of  product  to  100  units  of  labor. 
Grade  D,  yielding  700  units  of  product  to  100  units  of  labor. 
Grade  E,  yielding  600  units  of  product  to  100  units  of  labor. 

Let  us  assume  a  miniature  community  possessing  five  grades  of 
land,  as  indicated  in  the  above  table.  On  the  best  grade  of  land, 
which  is  of  limited  extent,  100  units  of  labor  will  produce  1000 
units  of  product;  on  the  next  grade,  900  units  of  product;  on 
the  next,  800  units  of  product ;  etc.  If  the  demand  of  the  com- 
munity were  for  only  1000  units  of  product  and  there  were  only 
100  units  of  labor,  only  the  best  grade  of  land  could  be  used. 
Until  it  was  all  in  use  there  would  be  no  rent.  But  if  the  popu- 
lation were  to  increase  so  that  there  was  an  increase  in  the  demand 
for  products  and  also  in  the  supply  of  labor.  Grade  A  would  not 


THE  RENT  OF  LAND  287 

continue  to  be  sufficient.  If,  for  example,  the  demand  were  to 
increase  so  that  1500  units  of  product  were  needed,  some  of  it 
would  have  to  be  produced  on  the  second  grade  of  land,  which 
would  thus  be  the  marginal  land.  On  this  marginal  grade,  how- 
ever, each  unit  of  labor  would  produce  only  nine  units  of  product, 
whereas  on  the  best  grade  it  would  produce  ten  units.  Clearly 
each  producer  would  rather  work  on  Grade  A  than  on  Grade  B. 
Because  of  this  preference  he  can  be  persuaded  to  pay  something 
for  the  privilege  of  working  on  Grade  A.  Approximately  one  unit 
of  product  for  each  unit  of  labor  would  be  paid  for  the  privilege 
of  farming  on  Grade  A.  An  owner  of  a  portion  of  Grade  A  who 
works  it  himself  is  better  oft"  than  an  owner  of  a  portion  of 
Grade  B.  This  excess  of  his  income  over  that  of  an  equally  good 
worker  on  Grade  B  is  rent  just  as  truly  as  though  he  received  it 
in  cash  from  a  tenant. 

If  the  demand  for  products  continues  to  increase  until  it  re- 
quires 2500  units  of  product,  some  of  Grade  C  will  have  to  be 
brought  into  use.  This  would  now  be  the  marginal  grade.  On 
Grade  C,  however,  each  unit  of  labor  produces  only  eight  units  of 
product.  Rather  than  work  on  this  land,  producers  would  be 
willing  to  pay  something  for  the  privilege  of  working  on  either 
Grade  A  or  Grade  B.  Each  unit  of  labor  would  be  willing  to  pay 
approximately  two  units  of  product  for  the  privilege  of  working  a 
portion  of  Grade  A,  or  one  unit  for  the  privilege  of  working  a 
portion  of  Grade  B,  rather  than  be  forced  to  cultivate  land  of 
Grade  C.  In  either  case  it  would  have  as  much  left  as  it  would 
have  if  it  got  the  whole  of  the  product  on  Grade  C  without  any 
deduction  for  rent.  If  we  go  on  assuming  an  increase  in  the 
demands  for  products  and  in  the  number  of  units  of  labor 
available  for  the  cultivation  of  land,  we  shall  find  each  of  the 
Grades  D  and  E  in  succession  brought  into  cultivation,  and 
the  rent  going  up  correspondingly  on  every  grade  except  the 
marginal  one. 

Relation  of  diminishing  returns  to  rent.  This  explanation, 
however,  is  incomplete,  as  any  explanation  of  rent  is  incomplete 
unless  it  takes  into   account  the   law   of   diminishing   returns. 


2  88  ELEMENTARY  ECONOMICS 

Even  on  the  best  land — in  fact,  on  any  grade  of  land — different 
applications  of  labor  and  capital  produce  different  results.  After 
a  certain  quantity  of  labor  and  capital  have  been  applied  to  the 
cultivation  of  a  given  piece  of  land,  further  increase  in  the  labor 
and  capital  does  not  yield  proportionately  increased  returns.^  If 
this  were  not  true,  it  would  never  be  necessary  to  cultivate  any  but 
the  best  grade  of  land.  If,  for  example,  200  units  of  labor  on 
Grade  A  of  the  land  described  in  the  table  on  page  286  would 
produce  2000  units  of  product,  that  would  be  better  than  to  spread 
it  over  both  Grades  A  and  B,  where  it  would  produce  only  1900 
units  of  product.  Again,  if  300  units  of  labor  would  produce  3000 
units  of  product,  and  400  units  of  labor  4000  units  of  product,  and 
so  on  indefinitely,  we  should  have  what  are  called  constant  returns 
as  opposed  to  diminishing  returns.  If  constant  returns  could  be 
secured  indefinitely,  as  stated  above,  it  would  never  be  advisable 
to  cultivate  any  land  but  Grade  A  of  our  illustration. 

But  the  simple  and  well-known  fact  is  that  increasing  appli- 
cations of  labor  and  capital  to  the  same  land  do  not  yield  constant 
returns,  much  less  increasing  returns.  Instead  of  200  units  of  labor 
yielding  2000  units  of  product  on  Grade  A,  and  300  units  of  labor 
yielding  3000  units  of  product,  it  is  more  likely  that  200  units  of 
labor  would  yield  1800  units  of  product,  and  300  units  of  labor 
2400  units  of  product,  or  some  such  quantity.  If  that  were  the 
case,  it  would  be  better  to  take  Grades  B  and  C  into  cultivation 
than  to  put  all  the  increasing  labor  supply  onto  Grade  A.  Unless 
something  like  this  rate  of  diminution  in  the  returns  should 
result,  the  inferior  grades  would  never  come  into  use  at  all. 

The  law  of  rent.  The  rent  of  a  piece  of  land,  therefore,  is 
determined  by  the  difference  between  what  can  normally  be  pro- 
duced upon  it  and  what  an  equal  amount  of  labor  and  capital 
can  produce  in  less  advantageous  positions  still  open  to  them. 
These  less  advantageous  positions  may  be  found  either  by  going 
onto  the  inferior  lands  still  uncultivated  or  by  crowding  onto  land 
already  cultivated. 

1  As  shown  in  Chapter  XXX,  on  the  Law  of  Variable  Proportions. 


THE  RENT  OF  LAND  289 

EXERCISES 

1.  What  is  meant  by  the  rent  of  land?  How  does  it  differ  from 
the  seUing  price? 

2.  Why  is  rent  paid? 

3.  Would  there  be  any  rent  if  all  land  were  equally  desirable  and 
of  unlimited  extent? 

4.  If  land  were  of  unlimited  extent,  but  some  tracts  were  more 
desirable  than  other  tracts,  would  there  be  rent? 

5.  How  much  rent,  under  these  conditions,  would  anyone  pay  for 
a  good  tract? 

6.  What  are  the  conditions  which  make  one  tract  of  land  more 
desirable  than  another  of  the  same  size? 

7.  What  is  meant  by  the  margin  of  cultivation? 

8.  What  are  some  of  the  things  which  would  cause  the  margin  of 
cultivation  to  be  extended? 

9.  If  the  best  grade  of  land  yielded  constant  or  increasing  returns, 
instead  of  diminishing  returns,  would  there  ever  be  any  occasion  for 
cultivating  an  inferior  grade  of  land? 


CHAPTER  XXXIV 
INTEREST  AND  THE  DEMAND  FOR  CAPITAL 

What  is  interest  ?  One  of  the  most  difficult  and  elusive  of  all 
problems  in  economics  is  that  of  the  interest  of  capital.  Interest 
may  be  delined  as  the  income  which  goes  to  the  owner  of  capital, 
whether  he  uses  it  in  his  own  business  or  lends  it  to  somebody 
else.  This  income  may  take  any  one  of  several  forms.  The  most 
common  and  clearly  understood  form  is  where  a  definite  sum  of 
value,  represented  usually  by  money,  is  lent  by  the  owner  to 
someone  else.  The  borrower,  in  return  for  the  loan,  eventually 
pays  back  not  only  the  principal  but  a  stated  sum  or  percentage  of 
the  principal  year  by  year.  But  the  purpose  of  the  borrower  was 
not  ultimately  to  secure  money.  Money  is  to  him  only  a  means  of 
purchasing  something  which  he  really  wants,  and  if  he  can  make 
the  purchases  without  actually  handling  the  money  his  purpose 
is  answered  just  as  well. 

In  other  cases  the  capitalist  may  transfer  to  the  borrower,  not 
purchasing  power,  but  the  material  goods  which  the  lender  desires 
and  which  he  would  buy  if  he  were  given  the  purchasing  power ; 
meanwhile  a  definite  sum  is  to  be  paid  at  stated  periods  for 
their  use. 

This  sum  is  frequently  called  rent  rather  than  interest,  and 
there  are  some  reasons  for  this  custom.  In  the  first  place,  the  sum 
which  is  paid  in  the  form  of  money  for  the  use  of  a  group  of 
material  objects  cannot  be  reduced  to  a  percentage  basis  until 
those  objects  are  evaluated  and  their  quantities  stated  in  terms  of 
value.  If,  however,  the  buildings  are  appraised  and  their  value 
stated,  then  it  is  possible  to  reduce  the  annual  payment  for  their 
use  to  a  percentage  basis.  Unless  the  transaction  takes  this  form, 
it  is  more  convenient  to  say  that  the  borrower  is  paying  rent  than 
to  say  that  he  is  paying  interest.   The  chief  reason  for  calling  it 

290 


INTEREST  AND  THE  DEMAND  FOR  CAPITAL     291 

interest  is  that  economists  have  formed  the  habit  of  speaking  of 
rent  as  that  which  is  paid  for  the  use  of  land,  and  of  interest  as 
that  which  is  paid  for  the  use  of  capital. 

Distinction  between  interest  and  profits.  In  still  other  cases 
the  income  of  the  capitalist  may  be  secured  from  the  use  of  capital 
in  his  own  business.  This,  however,  is  sometimes  difficult  to  dis- 
tinguish from  profits.  Economists  generally  distinguish  between 
interest  and  profits  in  this  way :  the  business  man  who  has  his 
own  capital  invested  in  his  business  is  allowed  the  current  rate  of 
interest  on  that  investment ;  if  he  labors  or  puts  in  his  time 
supervising  the  business,  he  is  also  allowed  a  salary  or  wages  of 
superintendence ;  if  he  has  anything  left  over  after  allowing  him- 
self interest  and  wages,  this  surplus  is  called  profit  or  profits. 

If  he  has  not  been  particularly  successful  the  profits  may  be 
negative ;  in  other  words,  he  may  incur  a  loss.  That  means  that 
his  total  income  may  not  be  as  great  as  it  would  have  been  if  he 
had  gone  out  of  business,  lent  his  capital  at  interest,  and  hired 
out  at  a  salary  as  a  superintendent. 

Interest,  therefore,  as  it  is  generally  defined,  includes  (i)  that 
which  the  owner  receives  for  the  use  of  a  fund  of  purchasing 
power  which  he  transfers  to  a  borrower;  (2)  that  which  he 
receives  for  the  use  of  material  goods,  buildings,  tools,  equip- 
ments, etc.,  which  he  permits  the  borrower  to  use  for  a  stated 
period;  and  (3)  that  which  he  receives  in  return  for  the  capital 
which  he  owns  and  which  he  uses,  or  has  invested,  in  his  own 
business. 

Why  is  interest  paid  ?  The  problem  of  interest,  thus  defined, 
divides  itself  into  two  parts :  first,  Why  is  interest  paid  ?  second, 
What  determines  the  rate  of  interest  ?  One  answer  to  the  first  ques- 
tion is  that  capital  is  productive.  This  could  apply  only  to  what 
we  have  defined  as  productive  as  opposed  to  acquisitive  capital. 

If  tools  are  useful  it  is  proper  to  ask,  For  what  are  they  useful  ? 
They  are  useful  for  production,  not  for  consumption.  With  an 
adequate  equipment  of  tools  one  can  produce  more  than  with  an 
inadequate  equipment.  The  formula  "More  and  better  tools, 
more  production;   fewer  tools  or  poorer  tools,  less  production" 


292  ELEMENTARY  ECONOMICS 

supplies  the  farmer  and  the  business  man  with  a  good  reason  for 
wanting  more  tools  and  being  willing  to  pay  for  them. 

In  any  given  situation,  with  any  given  type  of  equipment,  find 
out  how  much  you  can  produce  without  any  particular  unit,  and 
then  how  much  you  can  produce  with  it,  and  you  have  a  measure 
of  the  productivity  of  that  unit  in  that  situation.  At  any  rate, 
it  is  a  fair  test  as  to  how  much  that  unit  would  be  worth  when 
added  to  the  rest  of  the  equipment.  Apply  this  test  to  each  and 
every  kind  of  capital  required,  not  only  on  farms  but  in  shops  and 
factories,  railroads,  stores,  etc.,  and  we  get  an  idea  of  the  test  of 
the  usefulness,  or  productivity,  of  capital. 

Here  we  must  repeat  a  caution  which  was  given  in  the  discus- 
sion of  value.  We  are  not  to  discuss  the  productiveness  of  labor 
in  general  or  of  capital  in  general,  any  more  than  we  are  to  dis- 
cuss, under  the  problem  of  value,  the  utility  of  bread  in  general, 
meat  in  general,  or  water  in  general.  We  are  always  concerned 
with  definite  units  which  may  be  added  to  or  subtracted  from  the 
existing  supply.  Wherever  any  producer  finds  that  he  could  use 
more  capital  of  any  form  advantageously,  he  has  a  perfectly  good 
reason  for  trying  to  get  an  additional  unit  of  that  particular  kind 
of  capital.  Whether  we  call  it  the  productivity  of  the  unit  of 
capital  or  merely  its  usefulness  does  not  matter. 

The  opposite  method  of  reasoning  is  involved  in  the  statement 
that  if  there  were  no  labor,  capital  could  not  produce  anything. 
This  is  dealing  with  labor  in  general  and  capital  in  general.  It  is 
likewise  true,  of  course,  that  if  there  were  not  any  capital,  labor 
would  not  be  able  to  produce  very  much  during  the  next  month 
or  the  next  year, — not,  in  fact,  until  it  had  equipped  itself  with 
a  new  supply  of  tools. 

When  we  speak  of  the  productivity  of  capital  we  do  not  mean 
that  capital  is  productive  under  all  possible  circumstances,  regard- 
less of  the  surroundings.  Neither  is  labor  productive  in  that  sense ; 
it  has  to  be  located  where  there  is  at  least  land  available,  and  in 
order  that  it  may  be  very  productive  it  must  have  an  adequate 
supply  of  tools.  In  short,  nothing  is  productive  when  it  stands 
alone,  unrelated  to  many  other  things  in  the  surrounding  universe. 


INTEREST  AND  THE  DEMAND  FOR  CAPITAL      293 

Labor,  of  course,  is  a  more  fundamental  and  primary  agent  of 
production  than  capital,  since  capital  is  itself  the  result  of  labor, 
thrift,  and  enterprise.  But  we  are  not,  in  a  practical  work  on 
economics,  dealing  with  an  absolutely  primitive  economic  situ- 
ation; we  are  dealing  rather  with  the  conditions  which  we  find  all 
around  us,  and  with  the  specific  needs  of  specific  industries  and 
specific  communities. 

What  does  capital  include  ?  As  capital  was  defined  in  the 
chapter  devoted  to  that  subject,  it  includes  something  more  than 
producers'  goods.  It  includes  consumers'  goods  which  are  lent, 
rented,  or  hired  in  order  to  secure  income  for  their  owner.  In  these 
cases  the  income  of  the  capitalist  is  not  due  to  the  productivity  of 
the  consumers'  goods  thus  lent ;  it  is  due  rather  to  their  usefulness 
in  consumption.  He  who  builds  a  dwelling  house,  or  hires  some- 
one else  to  build  it,  and  then  rents  it  to  an  occupant  is  virtually 
selling  the  flow  of  utilities  which  the  house  furnishes  to  the  occu- 
pant during  a  definite  period  of  time.  These  utilities  are  in  the 
form  of  comfort,  convenience,  luxury,  and  even  style  in  some 
cases ;  but  the  problem  of  interest  is  much  the  same,  in  the  last 
analysis,  whether  the  capital  be  productive  or  acquisitive. 

Why  capital  is  wanted.  The  productivity  of  capital,  or  the 
advantage  of  having  the  use  of  it,  is  subject  to  the  principle  of 
marginal  productivity,  as  is  the  productivity  of  labor  and  land. 
If  you  increase  the  number  of  instruments  of  a  given  kind  in  any 
industrial  establishment,  leaving  everything  else  in  the  establish- 
ment the  same  as  before,  you  may,  within  limits,  increase  the  total 
product  of  the  establishment  somewhat,  but  you  will  not  increase 
the  product  in  proportion  to  the  increase  in  the  number  of  instru- 
ments in  question.  If  you  increase  all  the  instruments  in  a  given 
industrial  establishment  without  increasing  the  labor  at  the  same 
time,  each  instrument  will  be  used  a  little  less  intensively,  or  it 
will  be  idle  a  greater  number  of  minutes  per  day,  simply  because 
of  the  scarcity  of  labor.  On  the  other  hand,  of  course,  if  you 
diminish  the  number  of  instruments  or  the  total  equipment,  leav- 
ing the  amount  of  labor  the  same,  each  instrument,  or  each  unit 
of  the  equipment,  will  have  to  be  used  more  intensively. 


2  94  ELEMENTARY  ECONOMICS 

The  productivity  of  capital  decreases,  other  things  being 
equal,  as  its  quantity  increases.  Take  a  farm,  for  example.  With 
a  given  labor  force,  the  greater  the  number  and  variety  of  tools  and 
implements,  the  less  intensively  each  one  is  likely  to  be  used.  On 
the  other  hand,  the  smaller  the  number,  the  more  intensively  each 
is  likely  to  be  used.  There  are  many  farms  on  which  it  is  found 
that  there  are  such  a  number  and  variety  of  tools  and  implements 
that  the  farmer  is  really  not  getting  any  interest  on  a  large  part 
of  his  investment.  Some  expensive  tools  are  idle  so  much  of  the 
year  that  they  do  not  pay  for  themselves ;  that  is,  the  farmer  never 
gets  back  the  original  price  which  he  paid,  to  say  nothing  about 
getting  interest  on  that  price.  On  the  other  hand,  there  are  other 
farms  so  poorly  equipped  that  every  tool  is  used  very  inten- 
sively, and  it  would  be  money  in  the  farmer's  pocket  to  invest 
in  additional  equipment.  For  every  dollar  which  he  puts  into 
more  and  better  tools,  he  would  get  back  not  only  the  original  cost 
price  but  something  in  addition  which  could  be  called  interest  on 
the  investment. 

That  which  is  found  to  happen  on  farms  is  found  to  happen  also 
in  larger  industrial  establishments,  factories,  railroads,  etc.  That 
which  is  true  of  an  individual  farm,  shop,  or  other  business  estab- 
lishment is  true  also  of  the  community  as  a  whole.  If,  for  example, 
there  are  very  few  plows  in  a  given  community  where  there  is  an 
abundance  of  land,  many  laborers,  and  much  other  capital  besides 
plows,  each  and  every  plow  would  be  a  matter  of  considerable 
importance ;  it  would  be  in  general  demand  and  would  be  used  a 
great  number  of  days  in  the  year.  Under  these  conditions  you 
could  say  of  that  community,  "  One  more  plow,  considerably  more 
product;  one  less  plow,  considerably  less  product";  in  short,  the 
marginal  productivity,  in  that  particular  community,  of  that  form 
of  capital  called  plows  would  be  high.  If,  on  the  other  hand, 
there  were  a  great  number  and  variety  of  plows  in  the  community, 
other  factors  remaining  the  same,  each  plow  would  be  a  matter 
of  much  less  importance;  each  one  would  be  idle  a  greater  number 
of  days  in  the  year.  Then  you  could  say,  ''  One  more  plow,  com- 
paratively little  more  product ;  one  less  plow,  comparatively  little 


INTEREST  AND  THE  DEMAND  FOR  CAPITAL      295 

less  product " ;  in  short,  the  marginal  productivity  of  plows  would 
be  low  and  their  value  would  also  be  low. 

Applying  the  same  method  of  reasoning  to  other  forms  of  capital 
or  to  all  forms  of  capital,  we  reach  the  same  conclusions.  An 
abundance  of  all  forms  of  capital,  land  and  labor  remaining 
the  same,  would  give  a  low  marginal  productivity  to  capital ; 
whereas  a  scarcity  of  all  forms  of  capital,  land  and  labor  remain- 
ing the  same,  would  give  a  high  productivity  to  all  forms  of 
capital.  This  would  show  itself  in  the  case  of  liquid,  or  un- 
invested, capital.  Where  all  forms  of  capital  are  scarce,  one 
hundred  dollars  invested  in  tools  would  add  considerably  to 
the  productivity  of  the  community ;  but  where  all  forms  of 
capital  are  very  abundant,  one  hundred  dollars  invested  in  addi- 
tional tools  would  be  of  comparatively  little  value. 

EXERCISES 

1.  What  is  interest? 

2.  What  is  the  distinction  between  rent  and  interest? 

3.  Is  it  necessary  that  interest  be  paid? 

4.  If  there  were  no  saving,  would  there  be  any  capital? 

5.  Do  people  like  to  save? 

6.  If  they  do  not  like  to  save,  how  can  they  be  induced  to  do  so  ? 

7.  What  is  capital?    Why  is  it  needed? 

8.  Is  any  more  needed  than  we  now  have? 

9.  If  the  community  had  all  the  capital  it  needed,  would  there  be 
any  such  thing  as  interest? 


CHAPTER  XXXV 

INTEREST  AND  THE  SUPPLY  OF  CAPITAL 

Why  capital  is  scarce.  Seeing  that  the  productivity  of  capital, 
or  its  advantageous  use,  diminishes  as  the  supply  of  capital  in- 
creases relatively  to  other  factors,  and  increases  as  the  supply  of 
capital  diminishes  relatively  to  other  factors,  it  is  quite  important 
that  we  should  be  able  to  account  for  the  supply  of  capital  as  well 
as  for  its  demand.  Its  demand,  as  has  already  been  suggested,  is 
based  upon  its  desirability  in  production ;  that  is,  upon  its  pro- 
ductivity or  the  opportunity  for  its  advantageous  use.  Unless, 
therefore,  the  supply  were  in  some  way  limited,  capital  might  be- 
come so  abundant  as  to  leave  it  with  no  marginal  productivity. 
We  found,  when  we  were  discussing  the  value  of  commodities,  that 
the  cost  of  producing  them  operated  as  a  check  on  production  and 
kept  the  supply  within  such  limits  as  would  give  them  a  price 
approximately  sufficient  to  pay  the  cost  of  production.  Some 
factor  must  be  found  which  will  limit  the  supply  of  capital. 

Two  forms  of  cost:  (1)  The  original  cost  of  production. 
There  are  two  factors  which  are  obviously  at  work.  One  is  the 
mere  cost  of  producing  the  capital  goods;  the  other  is  the  cost 
of  waiting,  or  the  disinclination  which  the  average  individual  feels 
toward  waiting.  The  cost  of  producing  tools  needs  very  little  dis- 
cussion. Unless  the  farmer's  plow  will  return  him,  before  it  is 
worn  out,  enough  to  replace  the  price  which  he  originally  paid  for 
it,  he  will  of  course  have  no  motive  for  paying  that  price. 

(2)  The  irksomeness  of  waiting.  Suppose  that  the  plow  which 
cost  fifty  dollars  will  return  the  farmer  only  five  dollars  a  year 
and  will  last  ten  years ;  it  then  just  replaces  its  original  cost ; 
the  farmer  will  have  got  back  at  the  end  of  ten  years  the  money 
which  he  put  into  it,  and  no  more.  Meanwhile  he  has  had  to  wait 
ten  years.   If  he  did  not  mind  waiting, — if  waiting  were  not  in 

296 


INTEREST  AND  THE  SUPPLY  OF  CAPITAL      297 

the  slightest  degree  irksome  to  him, — he  would  probably  be  willing 
to  buy  a  plow  under  such  circumstances,  though  there  would  be 

neither  loss  nor  gain.    If,  however,  he  does  not  like  to  wait 

if  he  prefers  present  enjoyment  to  future  enjoyment, —  then  he 
would  hold  on  to  his  fifty  dollars  in  the  first  place  rather  than 
spend  it  for  something  which  would  return  fifty  dollars  in  ten 
years'  time. 

Under  these  circumstances  he  will  certainly  not  buy  the  plow 
unless  he  has  so  few  plows  as  to  give  a  higher  marginal  produc- 
tivity than  that  which  we  have  been  discussing.  But  if  he  has  so 
few  plows  that  the  possession  of  an  additional  plow  will  in  the 
course  of  ten  years  add  one  hundred  dollars  to  his  income,  he  will 
add  fifty  dollars  to  his  wealth  during  the  ten-year  period, — that 
is  to  say,  fifty  dollars  will  go  to  replace  the  purchase  price  of  the 
plow ;  the  other  fifty  dollars  is  surplus.  This  and  this  alone  is 
interest,  and  a  rather  high  rate  of  interest ;  namely,  10  per  cent. 
But  if  every  farmer  is  likewise  disinclined  to  wait,  the  market  for 
plows  will  be  limited.  Only  as  many  will  be  purchased  as  will  yield 
a  return  large  enough  to  more  than  pay  the  purchase  price.  In 
other  words,  farmers  in  general  will  get  some  interest  on  that  which 
they  invest  in  plows. 

Why  the  present  value  of  a  productive  agent  is  less  than  the 
future  value  of  all  its  products.  Now,  as  a  matter  of  fact,  people 
do  not  like  to  wait.  Waiting  is  to  some  quite  as  irksome  as  work- 
ing. It  is  also  quite  as  necessarv'  to  efficient  production.  Anything, 
whether  it  be  working,  waiting,  or  risking,  which  is  necessary  to 
efficient  production,  and  which  at  the  same  time  is  irksome,  must 
be  paid  for.  The  fact  that  it  is  necessary  for  production  furnishes 
a  sufficient  motive  for  paying  for  it ;  the  fact  that  it  is  irksome 
makes  it  necessary  to  pay  for  it,  because  men  will  not  otherwise  per- 
form this  function.  In  order  that  there  may  be  an  adequate  supply 
of  tools,  which  is  necessary  for  efficient  production,  there  must  be 
waiting.  Labor  must  be  performed  in  the  making  of  the  tools, 
and  then  somebody  must  wait  until  they  have  been  used  for  a  num- 
ber of  years  in  order  to  get  back  from  their  use  the  equivalent 
of  that  which  was  originally  expended  in  making  them.    If  the 


298  ELEMENTARY  ECONOMICS 

laborers  who  make  the  tools  are  not  themselves  willing  to  wait, 
they  may  sell  them  to  someone  else,  who  will  then  undertake  to 
wait  for  their  products  to  mature. 

Normal  price  must,  in  the  long  run,  cover  both  forms  of 
cost.  If  both  the  laborers  who  make  the  tools  and  the  one  who 
purchases  them  are  disinclined  to  wait,  the  market  price  of  the 
tools  will  have  to  be  something  less  than  the  sum  of  their  future 
earnings.  The  laborers,  being  disinclined  to  wait,  will  be  willing 
to  sell  for  a  cash  price  somewhat  lower  than  the  total  sum  of  the 
future  earnings,  and  the  purchaser  will  not  be  willing  to  pay  a 
price  which  would  equal  the  sum  total  of  the  future  earnings.  In 
the  price-making  process,  therefore,  the  capital  goods  must  neces- 
sarily sell  for  less  than  the  sum  of  the  future  earnings.  The  buyer 
who  holds  them  during  their  lifetime  finds  himself  in  possession  of 
a  surplus,  which  is  his  compensation  for  waiting. 

Though  it  is  not  likely  that  anyone  would  be  willing  to  wait 
ten  years  to  get  his  money  back,  he  might  be  willing  to  wait  if 
he  could  get  back  not  only  the  original  sum  of  money  but  a  surplus 
besides.  The  farmer,  for  example,  might  be  willing  to  pay  thirty 
dollars  for  a  plow  which  would  in  the  course  of  ten  years  earn  him 
fifty  dollars.  The  twenty  dollars  surplus  would  be  interest.  The 
problem,  as  it  presents  itself  to  the  farmer  who  is  contemplating 
investing  money  in  a  plow,  is  very  much  the  same  as  the  problem 
which  presents  itself  to  a  lender  who  is  contemplating  lending 
money  to  someone  else.  As  a  rule  he  prefers  to  keep  his  money 
rather  than  lend  it,  unless  he  can  get  a  surplus  by  lending  it. 
Every  form  of  investment  involves  the  same  problem. 

Not  all  waiting  is  irksome.  "WTiile  it  is  true  that,  as  a  general 
rule,  men  are  disinclined  toward  waiting  (that  is,  they  prefer 
present  to  future  goods) ,  still  there  is  a  certain  amount  of  waiting 
which  takes  place  normally  without  any  sacrifice.  There  would 
be  some  saving  even  if  no  interest  could  be  secured  on  savings. 
In  fact,  it  is  probable  that  a  considerable  amount  of  saving  would 
take  place  even  if  men  were  compelled  to  hire  vaults  or  storage 
places  in  which  to  keep  their  savings.  In  this  case  savings  could 
be  said  to  yield  negative  interest  rather  than  positive  interest. 


INTEREST  AND  THE  SUPPLY  OF  CAPITAL      299 

Anyone  who  is  gifted  with  a  moderate  degree  of  foresight  will 
look  ahead  and  consider  the  possibilities  of  future  emergencies. 
He  may  therefore  lay  up  for  a  rainy  day,  for  sickness,  or  for  old 
age,  even  though  there  is  no  possibility  whatever  of  securing  in- 
terest on  his  savings.  Taking  the  whole  community,  especially  if 
it  contains  a  great  many  well-to-do  people,  a  considerable  mass  of 
wealth  would  be  saved  for  this  reason  alone.  This  kind  of  saving 
may  be  said,  therefore,  to  involve  no  cost ;  and  yet  those  who  save 
in  this  way  are  able  to  secure  interest  on  their  savings,  along  with 
those  who  save  at  considerable  sacrifice. 

Some  capital  accumulated  without  expectation  of  interest. 
If  those  sums  which  are  saved  in  this  way  without  sacrifice  were 
sufficient  to  meet  the  demands  of  all  communities  for  capital,  such 
a  thing  as  interest  would  not  exist ;  that  is  to  say,  if  so  much  were 
saved  in  this  way,  and  there  were  so  few  opportunities  for  using 
capital  as  to  reduce  its  marginal  productivity  to  the  minimum, 
capital  would  practically  be  a  drug  on  the  market.  If,  however, 
the  opportunities  for  the  productive  use  of  capital  are  so  great 
that  more  capital  is  demanded  than  can  be  saved  without  cost, 
then,  in  order  to  induce  further  saving,  a  surplus  must  be  paid 
for  its  use. 

Interest  a  part  of  the  general  law  of  value  and  price.  The 
price  which  is  paid  for  the  use  of  capital  comes  under  the  same  law 
as  the  price  which  is  paid  for  anything  else.  In  the  chapter  on 
Scarcity  it  was  pointed  out  that  some  goods  are  produced,  under 
certain  circumstances,  practically  without  cost.  Trout,  where  the 
fishing  is  good,  are  caught  for  the  pleasure  of  the  sport.  If  the 
number  of  trout  that  can  be  caught  for  pleasure  is  sufficient  to 
satiate  the  desire  for  trout,  then  trout  command  no  price ;  if  this 
quantity  is  not  sufficient  to  satiate  the  desire,  and  consumers  are 
demanding  more,  then  they  must  begin  to  pay  a  price  to  induce 
other  fishermen  to  undertake  the  work  of  providing  an  adequate 
supply.  The  law  here  is  the  same  as  that  which  controls  capital. 
Some  capital  will  be  accumulated  without  cost.  There  is  probably 
no  community  in  existence,  however,  in  which  enough  capital  to 
supply  all  demands  is  provided  in  this  way.    It  is  therefore 


300  ELEMENTARY  ECONOMICS 

necessary  for  all  who  need  it  to  offer  a  price  in  order  to  induce  a 
larger  volume  of  saving  than  would  take  place  if  no  interest  were 
paid ;  that  is,  no  price  for  the  use  of  capital. 

The  cost  of  saving.  The  cost  of  saving  is,  like  other  forms  of 
cost,  ultimately  a  matter  of  psychology.  Among  people  who  are 
gifted  with  a  large  degree  of  forethought,  saving  is  less  irksome 
than  it  is  among  people  who  live  mainly  in  the  present,  A  com- 
munity with  little  forethought  is  therefore  always  a  community  in 
which  interest  rates  are  high,  because  there  will  be  small  accumula- 
tions of  capital  and,  the  supply  being  small,  there  is  great  need 
for  more.  It  is  the  need  for  more  of  a  thing  which  induces  people 
to  pay  a  price  for  it. 

The  functional  theory  of  interest.  This  theory  of  interest  may 
be  called  a  functional  theory  of  interest,  to  correspond  with  the 
functional  theory  of  value  and  the  functional  theory  of  wages, 
which  have  already  been  outlined.  The  function  of  a  high  price, 
as  has  been  pointed  out,  is  to  call  forth  a  larger  supply ;  the  func- 
tion of  high  wages  is  to  induce  a  larger  supply  of  the  labor  which 
receives  high  wages ;  and  the  function  of  a  high  rate  of  interest  is 
to  call  forth  a  larger  supply  of  capital  for  which  interest  is  paid. 
A  community  that  needs  more  capital  can  get  it  only  by  inducing 
larger  savings.  These  larger  savings  may  be  secured  either  by 
compulsion  (that  is,  by  taking  a  part  of  the  social  income  by  au- 
thority and  setting  it  aside)  or  by  attraction  (that  is,  by  offering 
a  reward  for  saving).  There  is  no  other  possible  way  that  has 
ever  been  suggested,  even  on  paper,  of  accomplishing  this  result. 


EXERCISES 

1.  Why  is  capital  scarce? 

2.  If  everybody  liked  to  save,  would  capital  be  scarce  ? 

3.  If  everybody  had  all  the  capital  he  needed,  would  he  be  willing 
to  pay  interest  ? 

4.  Why  does  he  not  have  all  he  needs  ? 
6.  Is  it  always  disagreeable  to  save? 

6.  Under  what  circumstances  does  it  become  disagreeable  to  save? 


CHAPTER  XXXVI 
PROFITS 

What  are  profits  ?  Profits  may  be  broadly  defined  as  the 
income  of  the  independent  business  man  who  receives  neither 
stipulated  wages,  rent,  nor  interest.  In  a  somewhat  narrower  sense 
they  include  whatever  he  has  left  over  after  he  has  allowed  him- 
self interest  on  his  own  capital,  rent  for  his  own  land,  and  wages 
for  his  own  labor.  This  would  seem  to  narrow  the  meaning  of 
profits  down  to  the  reward  for  taking  risk,  though  risk  must  be 
defined  rather  broadly.  The  enterpriser,  as  the  independent  busi- 
ness may  with  fair  accuracy  be  called,  is  essentially  the  man 
who  undertakes  something  and  relieves  others  of  a  part  at  least  of 
the  risk  which  they  would  otherwise  have  to  take. 

It  would  be  quite  possible,  for  example,  for  a  group  of  laboring 
men  to  borrow  capital,  build  their  own  factory,  and  run  it.  But 
if  they  did  so  they  would  always  be  in  danger  of  losing  not  only 
what  they  themselves  had  invested  but  even  their  wages  for  a 
time ;  that  is  to  say,  if  there  should  come  a  bad  season,  when  the 
demand  for  products  fell  off,  they  might  have  to  work  for  very  low 
wages  or  for  none  at  all.  If  some  individual  or  group  of  individ- 
uals will  undertake  to  run  the  business  for  them  and  guarantee 
them  a  certain  fixed  rate  of  wages,  they  are  relieved  of  a  part  of 
that  risk. 

Profits  as  payment  for  insurance.  Again,  the  men  who  furnish 
the  capital  may  jointly  assume  all  the  risks  of  the  enterprise. 
They  may,  however,  be  in  part  relieved  by  having  one  individual 
or  group  of  individuals  undertake  the  business  and  guarantee  them 
interest  on  their  capital.  In  such  a  case,  however,  the  enterprisers 
usually  have  to  invest  some  of  their  own  capital,  and  their  own 
capital  is  put  in  the  most  hazardous  position.  This  is  virtually 
the  distinction  between  common  stock  and  preferred  stock  in  a 

301 


302  ELEMENTARY  ECONOMICS 

corporation.  Those  who  own  the  common  stock  take  the  greater 
risk.  So  long  as  the  enterprise  is  running  at  all,  the  owners  of 
the  preferred  stock  must  get  their  interest,  whether  the  owners 
of  the  common  stock  get  anything  or  not ;  but  if  the  enterprise 
is  very  successful,  the  owners  of  the  common  stock  get  larger 
returns  than  the  owners  of  the  preferred  stock.  These  larger  re- 
turns over  and  above  the  rate  of  interest  will  be  called  profits. 

The  lure  of  an  enterprise.  In  a  smaller  business,  run,  let  us 
say,  by  an  individual  rather  than  by  a  corporation,  the  individual 
may  borrow  a  part  of  his  capital,  and  in  this  case,  so  long  as  he 
is  in  business  at  all,  he  must  pay  interest  on  what  he  borrows, 
whether  he  has  anything  left  for  himself  or  not.  In  case  the  busi- 
ness succeeds  very  well  he  gets  a  surplus  which  may  be  called 
profit.  The  lender  of  borrowed  capital  gets  no  more  than  the  stipu- 
lated rate  of  interest.  It  is  the  function  of  the  independent  busi- 
ness man  or  the  enterpriser  to  insure  the  other  participants  in  the 
industry  against  at  least  a  part  of  their  risk.  Any  income  which 
the  insurer  gets  over  and  above  the  normal  rate  of  interest  on  the 
capital  which  he  himself  puts  in  may  be  called  profit.  This  is  the 
lure  which  induces  men  to  undertake  risks  of  this  kind. 

This  suggests  a  functional  theory  of  profits  which  fits  in  with 
the  functional  theories  of  value,  wages,  and  interest  already 
described  in  the  previous  chapters.  The  function  of  high  profits  is 
to  induce  a  large  number  of  men  to  undertake  independent  enter- 
prises. Where  a  larger  number  of  such  enterprises  are  needed,  there 
are  only  two  ways  of  getting  them  started.  One  is  for  the  com- 
munity as  a  whole  to  take  a  part  of  the  social  income  and  by  au- 
thority invest  it  in  new  enterprises ;  the  other  is  to  offer  a  special 
inducement  to  private  individuals  to  undertake  the  new  enterprises 
voluntarily.  This  is  usually  done  by  the  offer,  on  the  open  market, 
of  high  prices  for  the  products  of  the  enterprise. 

Necessity  of  taking  risk.  Risk-taking  is  no  more  meritorious 
in  itself  than  is  waiting  or  working.  It  is  meritorious  only  when  it 
results  in  increased  production  and  well-being.  Still,  the  well- 
being  of  society  or  the  increased  production  of  the  goods  which 
society  needs  makes  it  absolutely  necessary  that  some  risks  should 


PROFITS  303 

be  taken.  Risk  is  therefore  something  which  cannot  be  avoided. 
These  risks  are  of  many  kinds  and  degrees.  The  tastes  of  the 
people  may  change  so  that  the  thing  which  is  to  be  produced 
may  be  no  longer  desired.  Some  new  invention  may  render 
obsolete  the  processes  used  and  the  machinery  which  has  been 
installed.  Strikes,  insurrections,  wars,  and  unforeseen  physical 
calamities,  such  as  fires,  storms,  and  earthquakes,  must  also  be 
taking  into  account.  Risk-taking  is  therefore  as  necessary  as 
working  or  waiting  in  order  to  get  effective  production  under  way. 

Irksomeness  of  risk.  Unless,  however,  risk-taking  were  in 
some  way  irksome  or  disagreeable  it  would  not  deter  men  from 
entering  business,  and  there  would  be  nothing  here  that  would  have 
to  be  paid  for.  That  is  to  say,  if  people  liked  to  take  risks  there 
would  be  no  hesitancy  in  entering  a  risky  occupation.  It  would 
therefore  not  be  necessary  to  offer  a  reward  to  induce  men  to 
enter  it.  But  since  risk-taking  is  irksome  or  disagreeable,  since 
men  would  rather  not  hazard  their  accumulations  and  their  present 
income,  they  must  be  paid  something  as  a  lure,  or  attraction,  to 
overcome  this  disinclination.  The  reason  here  is  precisely  the  same 
as  the  reason  for  paying  wages  or  interest,  or  for  paying  the  price 
of  any  commodity.  The  function  of  price,  in  a  free  country,  is 
to  overcome  the  disinclination  to  work,  wait,  or  take  risks. 

Relation  of  the  market  to  the  mathematical  value  of  a  risk. 
In  the  case  of  an  enterprise  which  does  not  appeal  to  the  gambling 
instinct,  men  are  generally  so  reluctant  to  invest  that  the  market 
value  of  the  risk  is  usually  somewhat  less  than  its  mathematical 
value.  Men  who  persist  in  buying  such  risks  inevitably  gain  if 
they  continue  long  enough  and  if  they  are  not  mined  by  their  early 
losses.  In  the  class  of  risks  which  appeal  to  the  gambling  instinct, 
the  more  one  invests  the  more  certain  one  is  to  lose.  If  one  were 
to  buy  all  the  lottery  tickets,  one  would  be  absolutely  certain  to 
lose,  because  the  management  sees  to  it  that  the  price  of  all  the 
tickets  exceeds  the  value  of  all  the  prizes.  In  the  other  class  of 
risks — namely,  those  which  do  not  appeal  to  the  gambling  in- 
stinct— the  market  value  is  less  than  the  mathematical  value, 
as  already  stated.    It  follows  from  this  that  if  you  were  to  buy  all 


304  ELEMENTARY  ECONOMICS 

such  risks,  you  would  be  absolutely  certain  to  gain,  for  the  sum 
total  of  the  market  values  is  less  than  the  sum  total  of  all  the 
mathematical  or  economic  values.  Those  who  invest  in  the  gam- 
blers' risk  as  a  class  lose  rather  than  gain  ;  those  who  invest  in 
the  ordinary  business  risks  as  a  class  gain  rather  than  lose. 

The  business  man  the  chief  bargainer.  Every  participant  in 
a  competitive  enterprise  is  more  or  less  a  bargainer,  but  the  inde- 
pendent business  man  is  the  chief  bargainer  of  all.  When  the 
laboring  man  has  bargained  for  a  rate  of  wages,  the  rest  of  his 
work  consists  not  in  bargaining  but  in  working ;  and  when  the 
capitalist  has  bargained  for  a  rate  of  interest,  that  is  the  end  of 
his  bargaining ;  so  with  the  landlord.  But  the  independent  busi- 
ness man  is  the  bargainer  per  se ;  he  bargains  for  everything, — 
his  raw  materials,  his  help,  his  capital, — and  he  also  bargains  with 
the  purchasers  of  the  product.  He  is  the  unbought  buyer  of  every- 
thing, and  the  unsold  seller  of  everything  connected  with  the 
business.  It  therefore  happens  that  skill  in  bargaining  is  one  of 
the  greatest  elements  in  his  success  in  securing  profits.  Bargain- 
ing, however,  consists,  in  the  first  place,  in  investing,  and  the 
investment  of  capital  is  a  very  delicate  operation.  To  invest 
successfully  one  must  foresee  the  future  needs  of  the  community 
as  expressed  in  the  demands  of  the  market.  To  err  at  this  point 
is  to  fail.  This  is  not  only  one  of  the  most  delicate  but  one  of  the 
most  important  of  all  economic  occupations.  Whether  the  pro- 
ductive power  of  the  country  is  conserved  or  wasted  depends  upon 
the  wisdom  of  its  investors. 

Because  of  the  disinclination  of  the  average  man  toward  taking 
the  ordinary  business  risk,  the  competition  is  somewhat  intense  for 
the  safe  positions  of  the  laborer  and  the  lender  of  capital.  The 
intensity  of  this  competition  tends  to  keep  their  shares  somewhat 
lower  than  they  would  otherwise  be,  but  this  disinclination  makes 
the  competition  somewhat  less  intense  among  the  business  men 
who  have  to  assume  the  chief  risks.  This,  in  turn,  leaves  them 
with  somewhat  larger  incomes  than  they  would  get  if  the  risks 
were  less  irksome  and  the  competition  more  intense.  The  surplus 
income  which  comes  to  them  in  this  way  is  called  profits. 


PROFITS  305 

EXERCISES 

1.  What  are  profits? 

2.  In  what  sense  does  the  independent  business  man  insure  others 
who  participate  in  production  ? 

3.  Is  there  any  reason  why  men  should  be  paid  for  taking  risk  ? 

4.  Suppose  there  is  something  that  cannot  be  produced  without 
risk,  and  also  that  men  do  not  like  to  take  risks,  would  it  be  neces- 
sary then  to  pay  for  risk-taking? 

5.  Does  it  make  any  difference  what  kind  of  risk  it  is? 

6.  Are  men  generally  disincHned  toward  taking  a  gambling  risk  ? 


CHAPTER  XXXVII 


THE  GOVERNMENT'S  SHARE 


Public  revenue.   A  certain  share  of  the  products  of  the  country, 

sometimes  called  the  national  income,  must  go  to  the  support  of 

government.    Literally  it  goes  to  pay  the  salaries  of  those  people 

who  are  doing  the  work  of  government  instead  of  the  direct  work  of 

production.  The  government's  share  is  usually  called  public  revenue. 

Classification  of  revenues.    There  are  various  sources  of  public 

revenue,   but   in    modern    times    the    chief   source    is    taxation. 

Henry  C.  Adams,  in  his  work  on  Finance,^  gives  the  following 

classification : 

Public  domains 

Public  industries 

Gratuities  or  gifts,  or  treasure-trove 

Confiscations  and  indemnities 

Taxes 

Public  J  ^    .     .  Fees 

_,  1  DenvaUve  revenue  ■{   . 

Revenue  Assessments 

Fines  and  penalties 

rSale  of  bonds  or  other  forms  of  com- 

.  Anticipatory  revenue  ■<      mercial  credit 

[Treasury  notes 


Direct  revenue  - 


In  former  times  the  public  domain  was  made  to  supply  a  large 
part  of  the  revenue  for  the  government.  In  fact,  under  the  feudal 
system,  property  in  land  and  something  resembling  public  office 
went  together.  The  king  had  his  own  demesne ;  so  likewise  did 
his  retainers  and  all  members  of  the  nobility.  The  nobility  formed 
the  chief  fighting  class  and  were  also  the  administrators  of  local 
government,  each  deriving  his  income  from  the  lands  which  were 
granted  to  him. 

^  The  Science  of  Finance,  p.  227.    New  York,  1899. 
306 


THE  GOVERNMENT'S  SHARE  307 

Public  industries  have  not  figured  very  largely  as  sources  of 
public  revenue,  unless  royalties  from  mines  could  be  put  in  this 
class.  A  number  of  European  cities  have  derived  portions  of  their 
revenue  from  their  own  water,  gas,  and  electric-light  plants. 
Gratuities  and  gifts,  as  well  as  treasure-trove,  are  negligible  sources 
nowadays.  Confiscations  and  indemnities  belong  to  a  lower  stage 
of  civilization,  where  militancy  and  the  lust  for  conquest  prevail. 
In  all  civilized  governments  taxes  have  become  the  chief  source  of 
revenue — fees,  assessments,  fines,  and  penalties  forming  subsidiary 
sources. 

What  is  a  tax  ?  A  tax  is  a  compulsory  payment  to  the  govern- 
ment for  which  the  government  does  not  return  to  the  individual 
payer  a  commodity  or  a  service.  The  money,  for  example,  which 
one  pays  for  a  postage  stamp  is  not  a  tax ;  it  is  rather  a  purchase 
of  a  service.  Where  a  municipality  owns  its  own  water  supply 
and  charges  water  rates,  these  rates  are  not  in  any  proper  sense 
taxes ;  they  are,  like  the  purchase  of  postage  stamps,  payments 
for  service.  The  same  is  true  of  the  price  paid  for  any  direct 
service  which  the  government   renders. 

To  be  sure,  the  government  renders  general  services  for  all  its 
taxes  ;  but  in  the  case  of  a  tax  there  is  no  attempt  to  apportion  the 
payment  exacted  of  the  individual  to  the  benefit  which  he  as  an 
individual  receives.  Doubtless  everyone  receives  some  advantages 
from  the  existence  of  an  army  or  a  navy,  of  courts,  or  of  police- 
men ;  but  his  tax  is  not  of  the  nature  of  a  purchase,  since  he  must 
pay  the  tax  whether  he  thinks  he  is  getting  anything  in  return  for 
it  or  not,  and  the  amount  of  the  tax  bears  no  relation  whatever  to 
what  he  thinks  the  value  of  the  service  of  the  state  may  be  to  him. 

Some  taxes  are  absolutely  compulsory ;  others  are  compulsory 
only  conditionally.  An  income  tax,  an  inheritance  tax,  or  a  poll 
tax  is  absolutely  compulsory'.  The  individual  has  no  choice  in  the 
matter.  An  excise  or  a  tariff  duty  may  be  avoided  by  avoiding 
the  use  of  the  articles  on  which  these  duties  are  levied.  One  may 
avoid  the  excise  duty  on  tobacco,  for  example,  by  refraining  from 
the  use  of  tobacco.  And  yet  when  one  pays  this  tax,  he  is  not 
receiving  from  the  government  a  service,  since  the  government  did 


3o8  ELEMENTARY  ECONOMICS 

not  produce  the  tobacco  but  only  charges  the  manufacturer  or  the 
dealer  for  the  privilege  of  manufacturing  and  selling. 

So-called  indirect  taxes.  The  taxes  just  described  are  generally 
called  indirect  taxes.  In  case  of  a  tariff  duty,  for  example,  the 
importer  of  the  dutiable  article  pays  the  tax  directly  to  the  gov- 
ernment. From  his  point  of  view  it  is  just  as  direct  as  any  tax. 
It  is  the  general  theory,  however,  that  the  consumers  of  the  im- 
ported articles  pay  the  tax  in  the  form  of  higher  prices.  In  cases 
where  that  happens  the  consumers  may  be  said  to  pay  the  tax 
indirectly.  This  is  by  no  means  always  the  case,  however,  and  it 
is  not  always  easy  to  determine  who  does  actually  pay  the  tariff 
duty.  It  is  therefore  doubtful  whether  or  not  the  term  "indirect 
taxation"  should  be  retained  in  economics. 

All  real  taxes  are  direct  in  the  sense  that  the  payers  pay  their 
money  directly  to  the  government.  In  some  cases,  however,  the 
payer  is  able  to  shift  the  tax  to  somebody  else  by  charging  a  higher 
price  for  a  product  or  by  paying  a  lower  price  to  the  one  from 
whom  he  himself  buys  the  product.  The  manufacturer  of  alcoholic 
liquor  pays  his  excise  duty  as  directly  to  the  government  as  any 
other  tax,  but  if  he  charges  the  consumer  a  higher  price  for  the 
liquor,  the  consumer  is  then  said  to  pay  the  tax  indirectly.  The 
manufacturer  may  also  pay  the  producer  of  the  raw  materials  a 
lower  price,  and  in  that  case  it  is  the  producer  who  pays  the  tax, 
in  part  at  least.  If  the  manufacturer  carries  a  part  of  the  bur- 
den which  he  is  unable  to  shift  to  someone  else,  he  himself  bears 
that  burden  directly,  not  indirectly. 

Taxes  and  monopoly  price.  A  common  abuse  of  the  word 
"taxation"  is  to  apply  it  to  monopoly  price  by  saying  that  the 
monopoly  taxes  the  people.  It  is  sufficient  in  a  case  of  this  kind 
to  say  that  the  monopoly  charges  too  high  a  price,  or  a  monopoly 
price;  bringing  in  the  word  "tax"  does  not  add  anything  to  the 
clearness  of  the  discussion.  WTiere  the  monopoly  sells  a  commod- 
ity or  a  service,  even  though  it  sells  it  above  cost,  the  individual 
gets  what  he  thinks  ought  to  be  the  equivalent  of  what  he  pays ; 
otherwise  he  would  not  purchase  the  article.  Similarly,  the  gov- 
ernment  might,   if  it  chose,   charge  more  for  postage  stamps 


THE  GOVERNMENT'S  SHARE  309 

than  the  cost  of  carrying  the  parcels.  This  would  not  properly 
be  called  a  tax ;  the  proper  expression  would  be  to  say  that  the 
government  is  charging  a  high  price. 

Compulsion  in  public  business.  Even  where  the  government 
derives  a  part  of  its  revenue  from  a  public  industry,  the  element 
of  compulsion  is  generally  present.  If  the  revenue  from  the 
industry  does  not  pay  expenses,  the  industry  cannot  become 
bankrupt  and  its  affairs  be  wound  up  by  legal  proceedings.  The 
government  can  merely  tax  the  people  or  derive  an  enforced 
revenue  from  some  other  source  to  pay  the  deficit ;  that  is,  it 
can  use  its  power  of  compulsion  to  keep  alive  an  unprofitable 
industry,  whereas  an  individual  or  private  corporation,  lacking 
the  power  of  compulsion,  would  have  no  power  to  keep  its 
business  alive. 

Again,  it  will  generally  be  found  that  the  government  exer- 
cises some  compulsion  by  excluding  competitors  from  its  own 
particular  field.  No  one  is  allowed  to  compete  directly  with  the 
Federal  post  office  in  carrying  first-class  mail.  The  government's 
power  of  compulsion  is  exercised  in  its  own  behalf.  In  fact,  it 
is  doubtful  if  there  is  a  case  on  record  where  any  government  has 
succeeded  in  doing  anything  well  on  a  purely  voluntary  basis.  It 
has  had  to  use  its  power  of  compulsion  at  some  point  or  other 
in  the  enterprise.  It  has  either  raised  funds  by  compulsion  or  ex- 
cluded competitors  by  compulsion,  has  repressed  opposition  and 
criticism  by  compulsion,  or  in  some  other  way  made  use  of  this 
great  advantage  which  it  possesses  over  all  private  organizations, 
in  order  to  insure  its  success. 

These  observations  are  made  not  for  the  purpose  of  criticizing 
or  opposing  government  enterprise,  but  merely  in  the  interest  of 
truth  and  accuracy.  Government  is  compulsion]  and  when  prop- 
erh^  exercised,  compulsion  is  beneficent.  One  of  the  great  and 
really  unsettled  questions,  however,  is  as  to  the  limits  within  which 
compulsion  is  beneficent  and  beyond  which  it  is  interference. 

Earmarks  of  a  good  revenue  system.  Henry  C.  Adams  gives 
the  following  as  the  marks  of  a  good  revenue  system :  ( i )  it  must 
be  adequate  to  the  just  wants  of  the  state;  (2)  it  must  present 


310  ELEMENTARY  ECONOMICS 

itself  as  a  system  and  not  as  an  aggregation  of  independent  and 
unrelated  facts;  (3)  in  a  federated  government  such  as  we  have 
in  the  United  States  the  revenue  domain  of  one  branch  of  the  gov- 
ernment should  not  encroach  upon  the  revenue  domain  of  another 
in  such  a  way  as  to  bring  confusion ;  in  other  words,  there  must 
be  harmony  and  balance  between  the  central  and  local  govern- 
ments, between  the  local  governments  themselves,  and  between 
the  several  organizations  of  local  government ;  (4)  it  should 
provide  for  elasticity  of  the  revenue  at  the  point  where  elasticity 
is  needed ;  that  is,  the  revenue  must  be  capable  of  increase  and 
decrease  whenever  and  wherever  it  is  needed. 

Double  taxation.  The  second  of  these  is  of  particular  impor- 
tance in  the  United  States  of  America.  Paraphrasing  the  famous 
rule  of  the  Donnybrook  Fair,  we  have  apparently  followed  the  rule, 
"Wherever  you  see  a  thing,  tax  it."  This  has  led  to  a  great  deal 
of  confusion, — to  double  taxation  in  some  cases  and  to  complete 
escape  from  taxation  in  others.  By  double  taxation  is  meant  tax- 
ing an  individual  or  different  individuals  twice  for  the  same  thing. 
If,  for  example,  a  farmer  owns  a  piece  of  land  and  also  has  in  his 
possession  a  piece  of  paper  called  a  deed  to  the  land,  and  if  he  is 
taxed  once  on  the  land  and  again  on  the  deed  to  the  land,  that  is 
obviously  a  case  of  double  taxation.  If,  however,  one  farmer  owns 
a  piece  of  land  and  another  owns  a  mortgage  on  it,  the  owner  of 
the  mortgage  is  virtually,  if  not  literally,  a  part  owner  of  the  land. 
If,  now,  the  farmer  pays  taxes  on  the  full  value  of  the  land,  and 
the  mortgage  owner  pays  on  the  full  value  of.  the  mortgage,  there  is 
an  equally  clear  case  of  double  taxation.  The  double  tax  really 
falls  on  the  farmer,  because,  where  mortgages  are  taxed,  the  in- 
terest rates  are  made  higher  in  order  to  recoup  the  lender  for  the 
tax  which  he  has  to  pay. 

During  the  recent  war  our  Federal  government  sold  large  num- 
bers of  bonds  bearing  3^  per  cent  interest.  One  of  the  arguments 
used  in  their  favor  was  that,  since  they  were  free  from  taxation, 
one  received  practically  as  much  net  income  from  them  as  he  would 
receive  on  taxable  property  yielding  nominally  5  per  cent.  This 
shows  pretty  clearly  that  taxes  affect  interest  rates. 


THE  GOVERNMENT'S  SHARE  311 

Where  mortgages  are  not  taxed,  the  same  argument  would  apply 
and  would  be  effective.  If  in  one  state  a  lender  is  compelled  to 
pay  a  i^^  per  cent  tax  on  his  mortgage,  and  in  another  state  he 
does  not  have  to  pay  any  tax,  if  he  is  an  honest  man  he  would  as 
lief  lend  at  3^  per  cent  in  the  latter  state  as  at  5  per  cent  in  the 
former.  If  he  is  dishonest,  however,  he  may  take  his  chances  on 
avoiding  taxation  in  the  former,  and  if  he  succeeds  he  may  receive 
his  5  per  cent  net. 

Again,  a  corporation  may  own  certain  amounts  of  visible  prop- 
erty, while  the  shareholders  have  pieces  of  paper  as  evidences  of 
their  ownership  of  undivided  shares  of  that  property.  If  the  visible 
property  is  taxed  and  the  individuals  are  also  taxed  on  the  pieces 
of  paper  which  they  hold  as  evidences  of  ownership,  the  effect  is 
very  much  the  same  as  though  the  farmer  were  taxed  on  his 
farm  and  also  on  the  deed  which,  like  the  share  in  a  corporation, 
is  only  an  evidence  of  ownership. 

Overlapping  of  tax  systems.  The  third  of  these  marks  of  a 
good  system  is  also  important  in  this  country.  The  conflict  of 
jurisdictions  between  Federal  and  state  governments,  and  between 
the  state  governments  themselves,  has  produced  a  great  deal  of 
confusion  and  also  a  great  deal  of  double  taxation.  Various 
remedies  for  this  situation  have  been  proposed,  among  others  the 
subdivision  of  the  various  sources  of  revenue,  each  grade  of  govern- 
ment being  allowed  its  own  particular  source. 

The  Federal  government,  for  example,  is  by  the  Constitution 
given  exclusive  right  to  levy  duties  on  imports.  Since  no  state  or 
municipality  is  permitted  to  enter  this  field,  there  is  no  confusion 
there.  It  has  also  been  suggested  that  real-estate  taxes  should  be 
left  exclusively  to  the  local  governments, — municipalities,  counties, 
and  townships.  It  is  thought  by  certain  writers  that  licenses  and 
franchises  also  should  be  left  exclusively  to  local  governments. 
Incomes  and  inheritances  would  seem  to  be  suitable  objects  for 
state  taxation.  Stamp  taxes  of  various  sorts  apparently  must  be 
left  to  the  Federal  government. 

No  very  clear  dividing  line  has  been  generally  agreed  upon  for 
the  separation  of  Federal  from  state  sources  of  revenue.    Certain 


312  ELEMENTARY  ECONOMICS 

writers  of  high  authority  hold  that  the  income  tax  should  belong 
exclusively  to  the  states  and  that  the  Federal  government  should 
keep  out  of  this  field.  Their  views,  however,  have  not  received 
general  public  support.  We  already  have  duplication  in  this  field ; 
that  is,  in  most  of  our  states  we  have  income  taxes  in  addition  to 
the  Federal  income  tax. 

Inelasticity  of  inheritance  taxes.  The  inheritance  tax  is  an 
excellent  source  of  revenue,  being  very  productive ;  but  it  should, 
from  the  nature  of  the  case,  be  a  permanent  tax  not  often  to  be 
changed.  In  the  course  of  a  generation  practically  every  estate 
will  pass  by  inheritance  and  be  taxed.  But  in  any  given  year  or 
decade  only  a  certain  percentage  of  them  will  pass  by  inheritance 
and  be  taxed.  If,  therefore,  the  tax  is  changed  frequently,  differ- 
ent estates  will  bear  very  different  burdens.  If,  during  a  few 
years,  a  very  high  inheritance  tax  prevails,  the  few  estates  that 
pass  by  inheritance  during  those  years  will  bear  a  heavy  burden ; 
and  if,  during  the  next  few  years,  there  is  a  very  low  tax,  the 
estates  which  pass  by  inheritance  during  those  years  will  bear  a 
very  light  burden. 

Income  tax.  An  income  tax,  however,  may  be  changed  fre- 
quently without  injustice  to  individuals.  Everyone  who  receives 
a  taxable  income  is  likely  to  receive  it  every  year.  The  tax  may  b^_ 
changed  every  year  without  showing  any  discrimination  in  favor 
of  or  against  individuals.  This  would  seem  to  make  it  necessary 
that  an  inheritance  tax  should  be  permanent  and  be  the  source  of 
a  considerable  revenue,  but  that  elasticity  should  be  secured  from 
an  income  tax,  which  may  be  changed  frequently  as  occasion 
demands  an  increase  or  decrease  of  public  revenue. 

General  property  tax.  The  characteristic  form  of  American 
taxation,  however,  is  what  is  known  as  the  general-property  tax. 
Nearly  every  state  in  the  Union  has  had,  either  in  its  constitution 
or  on  its  statute  books,  laws  requiring  the  equal  taxation  of  all 
forms  of  property.  In  many  cases  this  has  worked  to  the  utter 
confusion  of  our  financial  system.  One  result  is  that  visible  prop- 
erty is  taxed  and  invisible  property  escapes  The  farmer's  land 
and  buildings,  live  stock  and  machinery,  can  scarcely  be  hidden. 


THE  GOVERNMENT'S  SHARE  313 

and  the  assessor  finds  them.  Many  of  the  intangible  and  invisible 
forms  of  property,  however,  are  difficult  to  find  and  can  frequently 
escape  taxation.  Strange  as  it  may  seem,  many  rural  districts 
show  a  larger  percentage  of  personal  property  and  a  smaller  per- 
centage of  real  estate  than  most  of  our  cities,  because  much  of  the 
farmer's  personal  property  (machinery,  tools,  etc.)  is  of  a  kind  that 
cannot  well  be  hidden.  No  one  really  believes  that  farmers  own  a 
larger  percentage  of  personal  property  and  a  smaller  percentage 
of  real  estate  than  city  people,  and  yet  the  assessors'  books 
sometimes  indicate  that  they  do. 

Progressive  taxation.  Various  expedients  have  been  adopted 
to  make  taxes  more  just  than  they  are  under  the  crude  general- 
property  tax.  Among  these  laws  one  of  the  most  important  is 
what  is  known  as  the  graduated,  or  progressive,  tax.  This  may 
apply  either  to  general  property,  to  incomes,  or  to  inheritances. 
The  principle  of  the  progressive  tax  is  that  the  larger  the  sum  to 
be  taxed,  the  higher  the  rate  of  taxation.  To  begin  with,  even  an 
exemption  operates  to  a  slight  extent  as  a  progressive  tax.  An  in- 
come tax  which  exempts,  let  us  say,  $2000  from  all  taxation  and 
taxes  only  the  excess  above  S2000  is  slightly  progressive,  even 
though  it  is  nominally  proportional.  A  tax  of  i  per  cent  on  the 
excess  over  S2000  would  work  somewhat  as  follows :  On  S3 000 
the  tax  would  be  Sio,  which  is  one  third  of  i  per  cent  on  the  whole 
income  ;  on  $4000  the  tax  would  be  $20,  which  is  one  half  of  i  per 
cent  on  the  whole  income ;  on  S6000  the  tax  would  be  $40,  which 
is  two  thirds  of  i  per  cent  on  the  whole  income. 

A  genuinely  progressive  tax,  however,  proceeds  farther  than 
this.  It  begins,  let  us  say,  with  a  i  per  cent  tax  on  the  excess  above 
S2000,  I  per  cent  more  on  the  excess  above  Si 0,000,  and  i  per 
cent  more  on  the  excess  above  $50,000,  and  so  on.  Under  this 
scheme,  then,  the  individual  who  had  an  income  of  S6o,ooo  a  year 
would  pay  i  per  cent  on  $58,000  (the  excess  above  S2000),  2  per 
cent  on  850,000  (the  excess  above  $10,000),  and  3  per  cent  on 
$10,000  (the  excess  above  $50,000),  making  a  total  of  S1880. 
Whether  the  tax  be  an  income  tax,  an  inheritance  tax,  or  a  tax 
on  general  property,  the  principle  of  the  graduated  tax  is  the  same. 


314  ELEMENTARY  ECONOMICS 

Canons  of  taxation.  Adam  Smith,  in  his  ''Wealth  of  Nations," 
laid  down  what  have  since  his  day  been  called  the  canons  of 
taxation.    They  are  as  follows : 

(i)  The  subjects  of  every  state  ought  to  contribute  towards  the 
support  of  the  government,  as  nearly  as  possible,  in  proportion 
to  their  respective  abilities ;  that  is,  in  proportion  to  the  revenue 
which  they  respectively  enjoy  under  the  protection  of  the  state.  .  .  . 
(2)  The  tax  which  each  individual  is  bound  to  pay  ought  to  be  certain, 
and  not  arbitrary.  The  time  of  payment,  the  manner  of  payment, 
the  quantity  to  be  paid,  ought  all  to  be  clear  and  plain  to  the  con- 
tributor, and  to  every  other  person.  ...  (3)  Every  tax  ought  to  be 
levied  at  the  time,  or  in  the  manner  in  which  it  is  most  likely  to  be 
convenient  for  the  contributor  to  pay  it.  .  .  .  (4)  Every  tax  ought 
to  be  so  contrived  as  both  to  take  out  and  to  keep  out  of  the  pockets 
of  the  people  as  Httle  as  possible  over  and  above  what  it  brings 
into  the  pubUc  treasury  of  the  state.^ 

The  first  of  these  relates  to  the  general  question  of  justice ;  the 
others  are  so  obviously  practical  and  expedient  that  there  has 
never  been  any  serious  discussion  of  them.  A  great  deal  of  dis- 
cussion, however,  has  centered  round  the  first.  Just  what  is  meant 
by  "in  proportion  to  their  respective  abilities"  has  never  been 
definitely  decided.  At  first  thought  it  sounds  as  though  this 
meant  proportional  rather  than  progressive,  or  graduated,  taxation. 
If  we  assume  that  a  man's  ability  is  in  exact  proportion  to  his  in- 
come, then  obviously  if  he  pays  in  proportion  to  his  ability  he  must 
pay  in  proportion  to  his  income.  But  it  is  contended  that  a  man's 
ability  to  pay  increases  more  than  in  proportion  to  his  income, 
and  that  therefore  if  he  pays  in  proportion  to  his  ability,  he  must 
pay  a  progressive,  or  graduated,  tax  on  his  income  or  his  property. 
That  there  is  some  justification  for  this  opinion  is  evidenced  by  the 
almost  universal  practice  of  exempting  a  certain  minimum.  The 
individual  whose  income  is  barely  able  to  support  him  and  his 
family  may  be  said  literally  to  have  no  ability  to  pay  taxes,  and 
yet  he  has  an  income.  If  his  income  is  slightly  greater  than  neces- 
sary to  support  himself  and  his  family,  then  he  may  be  said  to  have 

1  Adam  Smith,  The  Wealth  of  Nations,  Vol.  II,  pp.  414,  415,  416. 


THE  GOVERNMENT'S  SHARE  315 

some  ability  to  pay  taxes.  This  obviously  calls  for  a  certain 
degree  of  progression  in  the  way  of  taxation. 

Repressive  taxation.  The  tendency  is  more  and  more  for  ex- 
pert opinion  to  favor  some  sort  of  progressive,  or  graduated,  taxa- 
tion as  more  just  than  proportional  taxation.  Just  how  far  in 
this  direction  we  should  go  is  not  easy  to  determine.  It  is 
never  wise  to  kill  the  goose  that  lays  the  golden  eggs.  Neither 
is  it  ever  wise  to  tax  anyone  so  heavily  as  to  drive  him  out  of 
productive  business.  If  taxes  are  ever  made  so  heavy  upon 
people  who  are  carrying  any  large  undertaking  as  to  discourage 
accumulation,  enterprise,  and  thrift,  the  state  will  be  doing 
itself  an  injury.  Professor  E.  A.  Ross^  has  suggested  a  new 
canon  of  taxation  to  add  to  the  four  which  Adam  Smith  gave  us : 
A  tax  should  be  as  little  repressive  as  possible. 

The  sum  and  substance  of  all  sound  taxation  is  that  the  taxes 
should  be  as  little  burdensome  as  possible.  The  burden  of  a  tax 
is  twofold.  There  is,  in  the  first  place,  the  disadvantage  to  the 
payer  of  the  tax.  It  is  a  loss  to  him  to  have  to  give  up  his  revenue. 
In  the  second  place,  there  is  the  discouragement  to  enterprise 
which  a  heavy  tax  involves.  This  is  particularly  disastrous  when 
the  government  is  irregular  and  whimsical  in  its  taxing  moods. 
When  producers  never  know  what  to  expect  from  the  goverrmient 
and  its  tax  collectors,  they  have  little  inducement  to  enterprise. 
Under  such  conditions  there  will  be  little  wealth  produced  for  the 
government  to  tax,  and  things  are  likely  to  go  on  from  bad  to 
worse. 

In  case  there  are  undesirable  businesses  which  the  government 
does  not  care  to  prohibit,  or  undesirable  habits  which  the  govern- 
ment does  not  care  to  suppress,  the  repressive  power  of  taxation 
may  be  used.  Men  may  then  be  made  to  pay  for  their  folly,  or 
to  give  up  their  folly  to  avoid  taxation.  In  extreme  cases  com- 
plete suppression  is  doubtless  better  than  mild  repression ;  in 
milder  cases,  such  as  luxurious  consumption,  ostentatious  dressing, 
etc.,  the  mildly  repressive  effect  of  a  tax  is  desirable. 

^"ANew  Canon  of  Taxation"  (abstract).  Publications  of  the  American 
Economics  Association  (1893),  Vol.  VIII,  pp.  49-50. 


3i6  ELEMENTARY  ECONOMICS 

EXERCISES 

1.  What  is  meant  b)^  the  government's  share? 

2.  What  are  the  different  kinds  of  public  revenue? 

3.  What  is  a  tax  ? 

4.  What  is  the  difference  between  direct  and  indirect  taxes? 

5.  Is  monopoly  price  the  same  as  a  tax? 

6.  What  are  the  marks  of  a  good  revenue  system  ? 

7.  What  is  meant  by  double  taxation? 

8.  What  is  meant  by  the  overlapping  of  taxation  systems? 

9.  What  is  an  inheritance  tax? 

10.  Ought  an  inheritance  tax  to  be  changed  frequently  ?    Why  not  ? 

11.  What  is  meant  by  the  general-property  tax? 

12.  What  is  meant  by  progressive  taxation? 

13.  What  are  Adam  Smith's  canons  of  taxation? 

14.  What  is  meant  by  repressive  taxation? 


PART  SIX.    THE  CONSUMPTION 
OF  WEALTH 


CHAPTER  XXXVIII 
MEANING  AND  IMPORTANCE  OF  CONSUMPTION 

Two  meanings  of  the  word  "consumption."  There  have  been 
two  meanings  given  by  economists  to  the  term  ''consumption  of 
wealth."  By  one  group  it  has  been  made  to  include  any  use  of 
wealth  in  which  it  is  worn  out,  used  up,  or  destroyed  in  the  proc- 
ess ;  by  another  group  it  is  defined  as  meaning  only  such  use  as 
gives  direct  satisfaction  to  a  consumer.  Under  the  first  definition 
coal  is  consumed  when  it  is  burned  to  make  steam  for  the  running 
of  machinery  as  well  as  when  it  is  burned  to  supply  warmth  for 
the  comfort  of  the  human  body.  Under  the  second  definition  only 
the  latter  use  of  coal  would  be  called  consumption. 

It  is  always  explained,  however,  that  the  term  "unproductive 
consumption"  does  not  mean  useless  or  unnecessary  consumption. 
It  means  that  wealth  thus  consumed,  in  contradistinction  to  that 
which  is  productively  consumed,  is  not  used  up  in  the  process  of 
producing  other  wealth.  It  is  used  rather  for  the  final  purpose  for 
which  all  wealth  is  commonly  supposed  to  be  produced ;  namely, 
the  direct  satisfaction  of  human  desires  or  needs. 

The  tendency  among  recent  writers  is  to  use  the  term  "con- 
sumption" in  the  narrower  sense.  By  the  consumption  of  wealth 
under  this  definition  is  meant  the  culmination  of  the  whole 
economic  process,  namely,  the  satisfaction  of  human  desires. 

The  purpose  of  the  user  is  the  determining  factor.  Under 
modern  conditions  goods  are  used  either  for  direct  satisfaction 
or  for  the  getting  of  an  income.  If  they  are  being  used  for  the 
getting  of  an  income,  they  are  not  being  consumed  in  the  economic 
sense.  The  physician's  automobile  which  is  used  in  his  profession 
is  being  worn  out,  but  it  is  not  being  consumed  in  the  economic 
sense.  When  the  same  automobile  is  used  for  his  own  enjoyment 
or  that  of  his  family,  it  is  being  consumed. 

319 


320  ELEMENTARY  ECONOMICS 

Importance  of  consumption.  Most  textbook  writers  on  eco- 
nomics have  regarded  the  consumption  of  wealth  as  a  department 
of  the  subject  coordinate  with  such  departments  as  production, 
exchange,  and  distribution.  None  of  them,  however,  has  given  as 
much  space  to  it  as  to  those  other  departments.  The  reason  has 
apparently  been  the  general  opinion  that  consumption  is  essentially 
an  individual  matter,  with  which  the  public  has  had  little  or  no 
concern.  Laws  relating  to  consumption  have  been  called  sumptu- 
ary laws  and  have  generally  been  condemned  or  only  half-heartedly 
approved.  There  is  a  growing  opinion,  however,  that  consumption 
is  quite  as  important,  from  its  effect  on  national  prosperity,  power, 
and  greatness,  as  any  department  of  economics.  Even  the  regu- 
lation of  consumption,  as  in  the  case  of  laws  regulating  or  pro- 
hibiting the  use  of  alcoholic  beverages,  is  becoming  popular. 

The  importance  of  the  consumption  of  wealth  is  further  em- 
phasized by  the  consideration  that  as  many  and  as  dire  calamities 
have  overtaken  nations  and  peoples  because  of  their  irrational 
habits  of  consumption  as  because  of  inefficient  systems  of  produc- 
tion, exchange,  or  distribution.  In  fact,  consumption  reacts  power- 
fully upon  all  the  other  departments,  particularly  upon  distribution. 
The  standard  of  living  of  the  laboring  classes,  which  is  a  part  of 
consumption,  has  much  the  same  influence  upon  the  price  of  their 
labor  as  that  exercised  by  the  cost  of  production  upon  the  price 
of  a  material  commodity.  Again,  the  rate  of  the  accumulation  of 
capital,  upon  which  so  many  things  depend,  is  largely  determined 
by  the  habits  of  consumption.  The  effect  of  luxury  upon  industry 
and  general  national  strength  is  one  of  the  largest  of  all  questions. 
These  illustrations  are  enough  to  show  that  the  subject  of  con- 
sumption deserves  the  most  careful  study  and  the  most  serious 
treatment  which  economists  can  give  it. 

Ratio  of  consumption  to  production.  In  a  profound  and  il- 
luminating article  on  War  and  Economics,^  Dr.  E.  V.  Robinson 
calls  attention  to  the  fact  that  in  any  country,  when  its  produc- 
tion exceeds  its  consumption,  the  result  is  economic  progress ; 
but  when  consumption  exceeds  production  the  result  is  economic 

^  Political  Science  Quarterly,  Vol   XV  (December,  1900),  p.  581. 


MEANING  AND  IMPORTANCE  OF  CONSUMPTION   321 

retrogression.  When  production  exceeds  consumption,  wealth  is 
accumulating  and  taking  on  durable  forms  ;  when  consumption  ex- 
ceeds production,  the  national  wealth  shrinks  and  the  nation  lives 
on  its  accumulated  capital  and,  moreover,  allows  its  accumulated 
fund  of  durable  wealth  to  deteriorate. 

When  production  exceeds  consumption,  moreover,  not  only  are 
durable  forms  of  wealth  conserved  and  kept  in  repair;  they  are 
continually  improved  and  new  forms  produced.  There  is  energy 
to  spare  from  the  work  of  producing  ephemeral  articles  for  im- 
mediate consumption.  Here  time  is  devoted  to  permanent  works 
and  new  forms  of  construction.  Durable  goods  multiply  in  quan- 
tity, capital  accumulates,  more  and  better  tools  and  equipment  are 
provided,  and  productive  power  accumulates  by  a  kind  of  geo- 
metrical progression. 

Whether,  in  the  nation  at  large,  production  exceeds  consumption 
or  not  depends  on  the  general  habits  of  the  average  person.  If  the 
average  person  demands  large  quantities  of  those  things  which 
supply  physical  and  temporary  satisfaction,  such  as  luxurious  food 
and  drink,  fashionable  clothing,  and  expensive  amusements,  there 
will  be  a  tendency  for  consumption  to  exceed  production.  If, 
however,  the  average  citizen  is  satisfied  with  the  kind  of  food 
which  nourishes,  with  clothing  which  affords  comfort  and  con- 
venience, with  amusements  which  are  inexpensive  and  which  tend 
to  preserve  the  health,  strength,  and  agility  of  both  mind  and 
body,  there  will  be  a  tendency  for  wealth  to  accumulate. 

Other  factors  are,  however,  involved.  There  might  be  a  popu- 
lation with  simple  habits  such  as  we  have  indicated,  but  with  no 
desire  for  the  durable  satisfactions  of  life  and  with  little  energy 
to  be  devoted  to  production.  Such  a  population  would  necessarily 
remain  in  a  low  state  of  civilization.  It  would  not  provide  abun- 
dantly either  for  the  temporary  or  for  the  permanent  means  of 
satisfaction,  but  would  remain  in  sloth  and  squalor.  But  if,  in 
addition  to  the  simple  habits  of  consumption  so  far  as  food,  cloth- 
ing, and  amusements  were  concerned,  the  average  person  possessed 
an  intense  desire  for  durable  goods, —  for  beautiful  buildings, 
libraries,  schools,  and  other  civilizing  agencies, — the  conditions 


32  2  ELEMENTARY  ECONOMICS 

would  be  favorable  to  the  accumulation  of  wealth  and  to  all  forms 
of  economic  progress.  If,  in  addition  to  all  these,  the  average  per- 
son were  energetic  and  not  disinclined  toward  work, — if  he  were 
willing  to  study  hard  and  work  hard,  and  if  his  motives  were  such 
as  to  drive  his  mind  and  body  at  high  speed, — the  conditions 
would  be  still  more  favorable.  This  combination  of  favorable  con- 
ditions would  make  progress  almost  inevitable.  Nothing  except 
a  geological  cataclysm  or  a  world  war  would  prevent  such  a 
people  from  advancing  in  the  arts  of  civilization. 

Preference  for  durable  goods.  It  is  to  be  borne  in  mind  that 
the  motives  and  desires  of  people  are  fundamental  to  this  problem. 
Any  people  can  have  as  much  progress  and  as  high  a  state  of 
civilization  as  they  desire,  provided  they  desire  them  strongly 
enough  and  are  willing  to  pay  the  price.  If  the  people  of  ancient 
Athens  had  preferred  to  spend  their  time,  their  energy,  and  their 
money  on  temporary  satisfactions  rather  than  on  the  architectural 
adornment  of  their  city,  they  could  have  done  so.  But  because 
they  chose  rather  to  spend  their  money  and  their  energy  on  durable 
goods,  they  left  the  world  richer  than  they  would  have  done  if 
they  had  made  the  ignoble  choice. 

The  same  comment  may  be  made  upon  the  people  of  various 
medieval  cities,  who  cared  so  much  for  their  religion  that  they 
were  willing  to  spend  their  money,  time,  and  energy  in  building 
cathedrals  as  monuments  to  their  religious  faith.  Similarly,  any 
city  of  today  can  be  as  fine  and  beautiful  as  it  wants  to  be,  pro- 
vided it  is  willing  to  pay  the  price.  If  it  chooses  to  follow  the 
example  of  those  cities  of  the  past  that  became  great  and  left 
something  to  show  that  they  once  existed, — something  to  justify 
that  existence, —  it  will  merely  be  choosing  to  consume  from  day 
to  day  and  from  generation  to  generation  less  than  it  produces,  in 
order  that  a  part  of  the  productive  energy  of  each  generation  may 
build  for  the  future.  That  spells  progress.  If  the  city  chooses 
otherwise,  it  will  never  leave  anything  to  show  to  future  genera- 
tions that  it  once  existed,  much  less  to  justify  that  existence. 

Value  of  a  man.  From  the  standpoint  of  progress  the  value 
of  the  individual  depends  on  the  excess  of  his  production  over  his 


MEANING  AND  IMPORTANCE  OF  CONSUMPTION    323 

consumption.  The  following  formula  will  determine  with  mathe- 
matical accuracy  how  much  a  person  is  worth  from  the  standpoint 
of  national  prosperity: 

V  =  P  -C 

In  this  formula  V  stands  for  value — that  is,  the  value  of  the 
man  ;  P  stands  for  his  production  ;  C,  for  his  consumption.  Thus 
the  formula  reads,  The  value  of  the  man  equals  his  production 
minus  his  consumption.  In  the  cases  where  his  consumption  ex- 
ceeds his  production  his  value  is  negative  ;  he  is  a  drag  on  progress, 
and  the  world  will  at  least  save  his  victuals  when  he  leaves  it. 

The  whole  life  is  the  unit.  Lest  this  be  too  hastily  interpreted, 
it  should  be  pointed  out  that  a  human  life  as  a  whole,  and  not  a 
fragment  of  it,  should  be  regarded  as  a  unit.  The  consumption  of 
a  child  exceeds  his  production,  but  this  does  not  condemn  him. 
So,  likewise,  during  the  declining  years  of  those  who  reach  a  good 
old  age,  consumption  may  exceed  production,  but  this  does  not 
condemn  the  life.  If  the  life  as  a  whole  produces  more  than  it 
consumes,  it  leaves  the  world  richer  by  that  difference. 

Again,  production  should  be  given  a  very  wide  interpretation. 
One  may  produce  without  handling  material  goods  of  any  kind, 
but  by  inspiring  the  productive  virtues  in  others,  by  teaching  pro- 
ductive skill  to  other  people,  by  scientific  investigation,  by  trans- 
mitting knowledge,  and  in  various  other  ways.  If,  after  making 
all  allowance  for  these  different  forms  of  productivity,  the  mature 
individual  in  sound  health  finds  that  he  is  producing  less  than 
he  is  consuming,  it  is  time  for  him  to  begin  to  consider  his  ways 
and  to  experience  a  change  of  heart.  He  needs  to  be  converted 
from  a  waster  into  a  producer. 

Boarders  at  the  national  table.  Dairymen  sometimes  use  the 
term  "boarder"  to  describe  a  cow  whose  feed  and  care  cost  more 
than  her  milk  is  worth.  Every  wise  dairyman  tries  to  get  rid  of 
his  boarders  and  keep  only  those  cows  whose  production  exceeds 
their  consumption.  It  would  seem  that  men  ought  to  be  held  to 
at  least  as  high  a  standard  as  that  to  which  cows  are  held.  A  man 
who  falls  below  that  standard  is  a  drain  upon  his  country. 


324  ELEMENTARY  ECONOMICS 

The  class  of  boarders  includes  not  simply  the  tramps  and  beg- 
gars but  everyone  else  who  is  not  usefully  engaged,  even  though 
he  or  she  lives  upon  his  wife's  or  her  husband's  fortune  or  upon 
inherited  wealth.  The  class  includes  even  others.  Even  those  who 
are  somewhat  usefully  engaged  may  be  consuming  such  expensive 
products  and  may  require  so  many  servants  to  wait  upon  them  as 
to  use  up  more  man  power  than  they  replace  by  their  own  work. 
As  a  mere  exercise  of  patriotism,  therefore,  every  mature  person 
should  ask  himself  seriously  whether  the  country  is  the  gainer  or 
the  loser  by  reason  of  his  existence,  whether  the  man  power  re- 
quired to  produce  for  him  and  take  care  of  him  is  greater  than  the 
man  power  which  he  contributes  to  the  nation's  fund. 

The  conservation  of  man  power.  The  importance  of  this 
consideration  is  peculiarly  clear  in  time  of  war  and  in  other  great 
emergencies.  The  necessity  of  conserving  every  ounce  of  man 
power  is  then  manifest.  We  then  see  clearly  that  anyone  who  is 
not  usefully  engaged  is  a  menace  rather  than  a  help  in  the  struggle. 
The  food  alone  which  such  a  person  consumes  is  acutely  needed, 
to  say  nothing  of  the  man  power  which  he  requires  in  other  ways. 

Even  those  who  are  usefully  engaged  ought  to  feel  that  luxu- 
rious consumption  at  such  a  time  is  an  interference  with  the 
welfare  of  their  country.  To  consume  unnecessary  luxuries  is  to 
require  an  unnecessary  quantity  of  man  power  to  produce  for  us. 
The  same  need  exists  in  time  of  peace,  though  it  is  not  so  acute 
and  is  not  fraught  with  such  tragic  results. 

EXERCISES 

1.  What  are  the  two  meanings  that  have  been  given  to  the  word 
"consumption"  in  economics? 

2.  What  happens  to  national  prosperity  when  consumption  exceeds 
production  ? 

3.  How  does  a  preference  for  transient  rather  than  for  durable 
goods  affect  the  national  prosperity? 

4.  From  the  standpoint  of  national  prosperity  how  should  you 
determine  the  value  of  a  man? 

5.  How  much  is  a  man  worth  who  consumes  more  than  he  produces  ? 


CHAPTER  XXXIX 
RATIONAL  CONSUMPTION 

Differences  between  a  high  and  a  rational  standard  of  living. 
Economists  have  generally  classified  standards  of  living  on  the 
basis  of  their  cost  or  expense.  A  high  standard  of  living  has  meant 
merely  an  expensive  standard ;  a  low  standard  simply  a  cheap 
standard.  Very  little  attention  has  been  given  to  the  difference 
between  a  rational  and  an  irrational  standard.  By  a  rational 
standard  of  living  is  meant  one  which  increases  the  margin  between 
one's  production  and  one's  consumption.  In  the  formula  V=P  —  C, 
as  given  in  the  preceding  chapter,  the  most  valuable  man  is  one  in 
whom  P  exceeds  C  by  the  greatest  margin.  The  purpose  of  the 
present  chapter  is  to  contend  that  the  most  rational  standard  of 
living  is  one  which  produces  the  most  valuable  man. 

This  margin  of  difference  between  P  and  C  would  be  increased, 
of  course,  either  by  decreasing  C,  by  increasing  P,  or  by  doing  both 
at  the  same  time ;  that  is,  if  without  reducing  in  any  degree  a 
man's  efficiency  as  a  producer,  he  were  to  reduce  his  cost  of  living, 
he  would  thereby  be  adding  to  his  value  from  the  economic  stand- 
point. To  that  extent  he  would  enable  the  community  to  produce 
more  than  it  consumed.  He  would  thus  be  a  factor  in  the  accumu- 
lation of  productive  power,  or  of  the  durable  products  of  civiliza- 
tion. If,  however,  by  reducing  his  cost  of  living,  he  at  the  same 
time  reduced  his  productive  efficiency  in  the  same  proportion, 
there  would,  of  course,  be  no  gain,  and  there  might  be  some  loss 
involved.  If,  on  the  other  hand,  by  spending  more  on  himself, 
especially  on  books  and  other  means  of  education,  on  tools,  or  on 
more  nourishing  food,  he  were  able  to  increase  his  productive  effi- 
ciency, his  increase  in  consumption  would  more  than  justify  itself. 

From  this  point  of  view  the  problem  for  every  individual  is  to 
adopt  that  standard  of  consumption  which  will  leave  the  largest 

325 


326  ELEMENTARY  ECONOMICS 

margin  between  production  and  consumption.  From  the  same 
point  of  view  it  would  frequently  be  necessary  that  one  man  should 
spend  more  on  himself  than  another  would  be  justified  in  doing. 
Take,  for  example,  a  great  surgeon  whose  time  is  exceedingly 
valuable,  not  only  to  himself  but  to  the  community  he  serves.  He 
might  very  properly  keep  an  automobile,  a  chauffeur,  and  other 
timesaving  devices  and  agencies.  He  might  even  keep  a  valet  to 
look  after  his  clothes.  If  these  forms  of  expenditure  would  enable 
him  to  give  more  people  the  benefit  of  his  skill,  it  would  be  to 
their  advantage  for  him  to  spend  money  in  these  ways.  But  an 
inexperienced  surgeon,  whose  time  is  not  valuable  to  the  com- 
munity,— who,  in  fact,  has  time  to  spare, — could  not  properly 
indulge  in  the  same  timesaving  devices.  For  any  person  whose 
time  is  not  very  valuable  to  the  nation  to  employ  a  valet  or  even 
a  chauffeur  would  be  ridiculous  waste  and  ostentation. 

Buying  trinkets  is  not  good  for  business.  In  opposition  to 
this  point  of  view  there  is  a  popular  theory  to  the  effect  that  lavish 
expenditure  is  somehow  good  for  business.  The  difficulty  with  this 
argument  is  that  it  always  assumes  that  if  the  individual  is  not 
consuming  lavishly,  he  must  necessarily  be  hoarding  his  money. 

It  is  surely  as  good  for  business  and  labor  that  one  should 
spend  money  on  builders  and  architects  as  on  milliners  and  con- 
fectioners. He  who  consumes  lavishly  spends  his  money  on  confec- 
tioners, milliners,  and  other  producers  of  immediate  and  temporary 
satisfactions.  He  who  consumes  rationally  spends  as  much  money 
as  he  who  consumes  lavishly,  but  spends  it  on  things  which  build 
and  improve,  rather  than  on  things  which  merely  afford  temporary 
gratification.  A  community  of  lavish  consumers  would,  of  course, 
give  actual  employment  to  those  whose  work  is  to  amuse  and 
gratify,  but  little  employment  to  builders  and  others  producing  for 
future  generations.  The  community  that  spends  money  in  build- 
ing for  future  generations  will  improve  from  generation  to  gener- 
ation ;  each  generation  will  inherit  from  the  preceding  one  a  larger 
fund  of  durable  wealth  and  will  add  to  this  and  bequeath  a  still 
larger  fund  to  successive  generations.  It  will  not  be  many  gener- 
ations before  the  latter  community  will  outstrip  the  former,  and 


RATIONAL  CONSUMPTION  327 

the  people  from  the  former  will  be  emigrating  to  find  employ- 
ment and  other  advantages  in  the  latter. 

The  miser  and  the  spendthrift.  Instead  of  placing  the  miser 
and  the  spendthrift  in  opposite  categories,  we  should  really  put 
them  together.  The  miser  is  a  lavish  consumer  in  a  most  impor- 
tant sense.  With  extreme  gratification  he  counts  his  hoard.  He 
loves  to  handle  it,  to  see  it  glitter,  and  to  hear  it  jingle.  He  is  in 
the  strictest  sense  a  consumer  of  gold.  If  our  traditional  miser, 
instead  of  hoarding  his  gold  in  his  cellar,  were  to  use  it  in  gilding 
his  house,  no  one  would  doubt  that  he  was  a  spendthrift.  The 
same  amount  of  gold  is  withdrawn  from  circulation,  and  much 
the  same  effect  on  the  market  is  produced  in  either  case. 

Both  the  miser  and  the  spendthrift  should  be  contrasted  with 
the  rational  buyer,  or  the  investor  in  durable  goods.  The  true 
investor  buys  goods  of  which  he  himself  will  probably  never  be 
able  to  absorb  the  full  utility.  He  buys  goods  that  will  last  so  long 
that  future  generations  will  get  a  part  of  their  utility.  Those  fu- 
ture generations  will  therefore  have  a  better  start  than  he  did.  If 
this  is  kept  up  indefinitely,  generation  after  generation,  by  all 
members  of  the  community,  it  will  be  a  very  prosperous  and  pro- 
gressive community ;  but  if  each  individual  of  each  generation 
merely  says,  "What  has  posterity  ever  done  for  me  that  I  should 
be  called  upon  to  do  anything  for  posterity?  Let  us  eat,  drink, 
and  be  merry !  "  that  will  always  be  a  backward  community. 

The  case  of  rival  communities.  It  was  suggested  above  that 
if  two  communities  started  side  by  side  with  equal  natural  advan- 
tages but  with  different  habits  of  spending,  we  might  get  a  test 
of  the  comparative  merits  of  those  habits.  This  may  be  used 
likewise  as  a  means  of  testing,  in  imagination  at  any  rate,  the  ra- 
tional quality  of  a  standard  of  living.  That  standard  of  living 
which  would  enable  a  community  or  nation  to  make  the  most 
rapid  and  permanent  progress  would  have  to  be  commended. 
Something  depends,  however,  on  our  definition  of  progress.  There 
may  be  about  as  many  ideals  of  progress  as  there  are  people  who 
have  ideals.  Without  attempting  a  full  and  complete  definition,  it 
would  seem  fairly  safe  to  suggest  that  among  other  things  progress 


32  8  ELEMENTARY  ECONOMICS 

should  include  general  improvement  in  comfort,  well-being,  and 
satisfaction. 

What  standard  of  living,  if  adopted  and  followed  persistently, 
generation  after  generation,  would  increase  the  comfort  and  well- 
being  of  the  community  and  develop  the  power  to  support  in- 
creasing numbers  of  people  and  support  them  better,  add  to 
the  productive  power  of  each  generation,  and  ultimately  raise 
the  economic,  social,  political,  and  even  military  strength  of  the 
nation  to  the  maximum?  Granting  that  there  are  other  factors 
in  the  problem,  we  still  have  the  right  to  insist  that  the  standard 
of  living  is  one  important  factor.  The  standard  of  living  which 
contributes  most  to  progress  as  we  have  defined  it  is  therefore  to 
be  commended.  That  standard  of  living  will  contribute  most  in 
which  the  net  contribution  of  the  average  person  is  the  highest ; 
that  is,  where  his  production  exceeds  his  consumption  by  the 
widest  margin. 

It  must  begin  to  appear  that  rational  consumption  is  as  impor- 
tant a  factor  in  national  prosperity  as  efficient  production.  In  a 
most  important  sense  useless  consumption  is  a  waste  ■  of  labor, 
or  of  productive  power,  since  it  requires  labor,  or  productive 
power,  to  produce  the  useless  things  which  we  consume.  The 
labor  which  produces  these  useless  things  is  wasted  as  truly  as 
though  it  were  idle,  badly  directed,  or  working  with  crude  and 
unsuitable  tools. 

Liberal  ideas  as  to  what  is  necessary.  It  is  well,  however,  to 
be  rather  liberal  in  our  ideas  as  to  what  is  necessary  in  order  to 
maintain  a  man's  working  capacity  at  its  maximum.  Considerable 
recreation  and  relaxation  are  always  recognized  as  necessary.  The 
anticipated  enjoyment,  not  only  of  games  and  other  forms  of 
recreation  but  of  objects  of  comfort  and  delight,  is  a  spur  to 
energy.  It  is  not  only  a  spur  to  energy;  it  is  also  a  means  of 
creating  and  preserving  a  joyful  frame  of  mind,  without  which 
sustained  effort  is  impossible,  and  without  which  it  is  frequently 
asserted  that  no  really  fine  work  of  any  kind  is  ever  done. 

Joy  in  work.  Looking  forward  to  a  holiday  or  a  vacation  has 
sustained  many  a  worker  through  weeks  and  months  of  study  and 


RATIONAL  CONSUMPTION  329 

toil.  The  desire  to  possess  a  bicycle  or  an  automobile  has  gal- 
vanized many  an  otherwise  indolent  boy  into  an  active  worker. 
The  pleasure  of  giving  toys  to  their  children  at  Christmas  time 
has  lightened  the  toil  of  many  a  father  and  mother  through  many 
a  hard  winter. 

Tools  as  consumers'  goods.  The  world  has  undoubtedly  lost 
much,  in  productive  efficiency  as  well  as  in  the  joy  of  living, 
through  its  failure  to  appreciate  the  possibility  of  turning  tools 
and  other  producers'  goods  into  consumers'  goods.  That  one  must 
have  good  tools  in  order  to  do  good  work  has  long  been  recognized, 
but  we  have  scarcely  begun  to  realize  the  full  meaning  of  the  term 
"good  tools."  It  is  not  only  necessary  that  they  be  capable  of 
doing  their  purely  mechanical  work ;  it  is  also  essential  that  they 
please  the  mind  of  the  worker.  They  must  be  pleasing  to  look 
upon  as  well  as  agreeable  to  the  hand. 

The  purpose  of  a  tool  is  to  bridge  the  gap  between  the  worker 
and  the  object  upon  which  he  is  working, — to  enable  him  to  trans- 
fer to  the  object  the  idea  which  he  has  in  mind.  It  must  therefore 
fit  the  mind  of  the  worker  as  well  as  his  hand  and  his  arm. 

The  importance  of  having  tools  which  help  to  keep  the  worker  in 
an  agreeable  frame  of  mind  is  not  so  much  in  the  fact  that  he  can 
do  more  or  better  work  in  a  given  minute  or  a  given  hour,  though 
there  is  something  in  that.  The  chief  importance  lies  in  the  fact 
that  he  can  keep  at  it  for  more  minutes,  more  hours,  more  days, 
and  more  years.  Some  rare  geniuses  are  able  to  work  regularly 
and  all  the  time,  ''taking  infinite  pains"  and  apparently  never 
tiring.  Most  of  us,  however,  are  desultory  creatures  who  have 
to  coax  ourselves  to  work  steadily.  It  is  easier  to  coax  ourselves 
to  work  properly  if  our  tools  are  such  as  we  delight  to  handle  and 
our  workshop  is  a  place  where  we  delight  to  be. 

Pride  in  work.  The  spirit  which  regards  work  as  a  more  or 
less  repulsive  necessity — which  tries  to  cover  up  in  many  ways 
the  evidences  of  work — is  probably  responsible  for  a  large  part 
of  the  neglect  which  we  have  shown  to  our  working  places. 
Naturally  enough  a  person  who  regards  work  merely  as  a  disagree- 
able necessity — something  to  be  ashamed  of  and  avoided  on  every 


330  ELEMENTARY  ECONOMICS 

possible  pretext — is  not  likely  to  spend  very  much  money  on  the 
adornment  of  his  tools  or  the  beautification  of  his  working  place. 

No  rural  neighborhood,  for  example,  is  quite  so  desolate  as  that 
from  which  people  retire  as  soon  as  they  have  accumulated  enough 
to  enable  them  to  live  in  town.  Farmers  who  retire  as  soon  as  they 
can  possibly  afford  to  do  so  are  not  likely  to  spend  much  money 
in  adorning  their  farmhouses  or  in  making  the  neighborhood 
attractive.  It  is  only  where  you  find  farmers  who  are  glad  that 
they  are  farmers — who  expect  to  remain  farmers  and  whose 
children  look  forward  to  the  same  career — that  you  find  the 
farms,  the  homes,  and  the  community  adorned  and  beautified. 

If  it  were  not  for  the  fact,  referred  to  above,  that  town  people 
have  inherited  certain  aristocratic  traditions  (or  else  that  they  try 
to  ape  those  who  have)  and  are  rather  anxious  to  get  away  from 
the  sources  of  their  incomes,  they  might  find  it  possible,  in  some 
cases  at  least,  to  live  near"  their  places  of  business.  If  they  all  did 
so  they  would  spend  their  money  there  and  would  also,  if  they 
could  afford  it,  beautify  those  surroundings  as  they  now  beautify 
the  suburban  districts  where  they  live. 

It  is  astonishing  how  much  of  the  fashion  of  the  world  is  due 
to  the  desire  to  avoid  the  appearance  of  having  to  work,  or  even  to 
advertise  the  fact  that  one  does  not  have  to  work.  In  old  times 
certain  Chinese  magnates  used  to  allow  the  finger  nails  to  grow 
to  extraordinary  lengths  as  a  visible  sign  that  they  did  not  have 
to  work.  The  binding  of  the  feet  of  the  girls  is  said  to  have  had 
the  same  origin.  The  train  of  her  gown,  which  only  lately  was 
a  fashionable  necessity  for  every  lady  in  Christendom,  answered 
much  the  same  purpose. 

The  opposite  tendency  shows  itself  once  in  a  while,  however. 
A  good  farmer  usually  likes  to  work  with  a  handsome  team,  well 
groomed  and  harnessed.  The  team  is  to  him  both  a  consumers' 
good  and  a  producers'  good.  There  is  not  much  doubt  that  such 
a  farmer  works  more  cheerfully  and  more  steadily  and  that  he 
finds  life  more  enjoyable  than  he  would  if  he  tried  to  get  along 
with  an  ill-matched,  poorly  harnessed  team  in  which  he  could  take 
neither  pride  nor  satisfaction. 


RATIONAL  CONSUMPTION  331 

It  is  reasonable  to  suppose  that  we  should  all  do  better  and  more 
persistent  work  and  get  more  enjoyment  out  of  life  if  we  took 
some  pains  to  make  the  conditions  of  our  work  attractive.  If  this 
is  so,  it  is  a  matter  of  great  economic  importance.  More  attention 
to  this  subject  will  contribute  to  the  prosperity,  strength,  and 
greatness  of  the  nation,  and  even  more  to  the  enjoyment  of  the 
people.  Expenditure  for  the  embellishment  of  our  tools  and  the 
adornment  of  our  working  places  would  form  a  part  of  a  rational 
system  of  consumption, 

EXERCISES 

1.  What  is  meant  by  a  high  standard  of  living? 

2.  Is  it  the  same  as  a  rational  standard  ? 

3.  Is  it  good  for  business  to  spend  money  extravagantly  or  to  buy 
things  of  trivial  importance? 

4.  Is  there  any  essential  difference  between  the  miser  and  the 
spendthrift?     If  so,  what? 

5.  Does  a  thrifty  community  in  the  long  run  spend  more  or  less 
than  a  thriftless  community? 

6.  What  is  a  necessary  of  life  ? 

7.  It  is  possible  to  think  of  the  tools  of  production  as  consumers' 
goods?     In  what  sense  could  they  be  so  considered? 

8.  Is  it  possible  to  think  of  work  itself  as  a  form  of  consumption? 
Is  play  a  form  of  consumption  or  a  form  of  production  ? 


CHAPTER  XL 
LUXURY 

Different  classes  of  consumers'  goods.  Consumers'  goods  have 
been  divided  into  four  classes,  according  to  the  kind  of  desires 
which  they  are  designed  to  satisfy.  They  are  necessaries,  com- 
forts, decencies,  and  luxuries.  This,  however,  is  at  best  only  a 
rough  classification.  It  may  seem  fairly  easy  to  distinguish  be- 
tween necessaries  and  comforts,  and  there  are  doubtless  many  cases 
where  goods  are  easily  classified ;  but  there  are  also  many  cases 
where  it  is  difficult  to  determine  whether  the  good  in  question  is  a 
necessary,  a  comfort,  or  even  a  decency.  Another  difficulty  which 
tends  to  obscure  the  distinction  is  found  in  the  fact  that  no  one, 
however  poor,  confines  himself  to  necessaries.  Part  of  his  ex- 
penditure will  go  for  comforts,  part  for  decencies,  and  part  even 
for  luxuries.  Again,  no  one,  however  rich,  can  avoid  the  buying 
of  necessaries  and  comforts. 

Necessaries.  In  a  general  way  we  may  define  necessaries  as 
all  goods  which  are  required  for  the  maintenance  of  physical  health 
and  strength,  not  only  of  the  mature  man  but  also  of  his  family. 

Comforts.  Of  all  classes  of  goods,  comforts  are  the  most  diffi- 
cult to  define.  They  include  everything  which,  though  not 
absolutely  necessary  for  health  and  strength,  can  yet  hardly  be 
dispensed  with  in  any  society  where  life  is  really  worth  living.  A 
young  and  vigorous  person  might,  by  running  to  and  from  his  work 
in  cold  weather,  dispense  with  an  overcoat.  From  his  point  of  view 
an  overcoat  could  hardly  be  called  a  necessary,  and  yet  it  would  be 
a  great  comfort.  Cushions  or  upholstered  furniture,  spring  mat- 
tresses, etc.  can  hardly  be  called  absolute  necessaries,  and  yet  they 
would  be  considered  almost  indispensable  by  the  average  family. 

Decencies.  The  dividing  line  between  comforts  and  decencies 
is  likewise   obscure.    By  decencies  we  mean   those   articles   of 

332 


LUXURY  SS3 

consumption  which  the  habits  or  customs  of  one's  neighborhood 
or  one's  class  prescribe,  and  without  which  the  individual  or  the 
family  would  feel  that  it  could  scarcely  maintain  its  position  of 
respectability.  Anything  which  an  individual  member  of  any  class, 
occupation,  or  profession  would  feel  ashamed  to  be  without  would 
come  under  our  definition. 

Luxuries.  Luxuries  are  articles  of  consumption  which  are  not 
required  for  the  physical  health  and  strength  of  the  people  for 
their  physical  comfort,  or  by  the  rules  of  society,  but  are  wholly 
matters  of  individual  indulgence-.  The  dividing  line,  however, 
between  decencies  and  luxuries  is  still  very  obscure.  If  a  person 
belongs  to  a  small  group  of  spendthrifts,  it  may  be  claimed  that 
the  rules  of  his  social  group  compel  him  to  spend  money  lavishly 
on  things  which  others  would  regard  as  pure  luxuries.  He  may 
therefore  claim  that  these  are  only  decencies,  because  they  are 
prescribed  by  the  rules  of  his  group  or  class. 

Instead  of  accepting  the  verdict  of  any  special  class  or  set,  it 
would  seem  better  to  confine  our  idea  of  decencies  to  those  things 
which  are  prescribed  by  the  almost  universal  consensus  of  opinion 
of  the  time  and  place.  Thus,  in  America,  for  example,  it  would 
almost  universally  be  thought  indecent  for  men  and  women  to 
appear  in  public  places,  even  in  warm  weather,  without  shoes, 
though  there  are  certain  isolated  communities  where  this  rule 
would  not  prevail.  Before  the  advent  of  the  waist  shirt  it  was 
generally  regarded  as  improper  for  a  man  to  appear  at  any  public 
place,  especially  indoors,  without  a  coat.  That  every  woman  shall 
possess  certain  articles  of  finery  is  a  rule  even  among  the  poorest 
of  people.  It  will  be  better,  therefore,  if  we  restrict  the  definition 
of  decencies  to  those  thjngs-whlch  society  in  general  prescribes. 
Things  demanded  by  the  fashions  of  some  special  clique  or  coterie 
would  haveTolae  calletfTuxuries. 

Stimulating  effect  of  luxury.  Economists  have  been  some- 
what divided  on  the  question  as  to  whether  a  luxury  is  always  to 
be  condemned  or  not.  McCulloch^  states  that  any  gratification, 
however  trivial,  is  necessary  if  an  individual  is  stimulated  to 
1  J.  R.  McCulloch,  The  Principles  of  Political  Economy.   Edinburgh,  1825. 


334  ELEMENTARY  ECONOMICS 

work  in  order  to  attain  it.  John  Stuart  Mill^  says,  "To  civilize 
a  savage,  he  must  be  inspired  with  new  wants  and  desires,  even  if 
not  of  a  very  elevated  kind,  provided  that  their  gratification  can 
be  a  motive  to  steady  and  regular  bodily  and  mental  exertion." 

It  is  a  well-known  fact  that  in  certain  low  states  of  civilization 
the  laborer  or  the  peon  is  content  with  so  few  articles  of  consump- 
tion that  he  will  not  work  efficiently  or  steadily.  If  by  working 
three  days  in  a  week  he  can  earn  wages  enough  to  support  him, 
in  the  style  to  which  he  is  accustomed,  for  seven  days,  he  will  work 
only  three  days  in  the  week.  It  has  been  generally  recognized 
that  the  only  cure  for  this  difficulty  is  to  raise  his  standard  of 
living  and  increase  his  wants,  so  that  he  will  have  a  motive  for 
regular  and  steady  work.  Many  interesting  stories  are  told  of  the 
devices  by  means  of  which  the  laborer  is  induced  to  work  or  by 
which  his  wife  is  induced  to  demand  more  wages  of  him  in  order 
that  she  may  provide  herself  with  finery. 

We  need  not  go  to  backward  countries,  however,  to  find  examples 
which  illustrate  precisely  the  same  principle.  There  are  men 
among  us  who  reduce  the  number  of  working  hours  per  day  or 
week  for  much  the  same  reason.  Finding  that  they  can  earn 
enough  in  four  hours  to  support  them  for  twenty-four,  they  choose 
to  work  only  four  hours  a  day ;  that  is,  they  go  to  their  offices  at 
about  ten  o'clock  in  the  morning  and  stay  until  about  two,  and 
spend  the  rest  of  the  day  at  the  club  or  the  golf  course.  There  are 
still  others  who  find  that  they  can  earn  enough  in  twenty  years 
to  support  them  for  the  whole  of  their  lives.  They  therefore  retire 
from  business  long  before  their  physical  and  mental  capacity  has 
begun  to  decline,  and  spend  the  rest  of  their  time  in  pleasant 
pursuits. 

Economically  speaking,  however,  all  these  men,  from  the  peon 
up,  are  merely  choosing  between  different  kinds  of  luxury.  To  the 
peon,  leisure,  sport,  amusement,  and  even  rest  are  luxuries  in  which 
he  delights.  If  his  desire  for  this  sort  of  luxury  is  stronger  than 
his  desire  for  other  kinds,  he  will  choose  this  kind.  The  same  is 
true  of  the  man  who  cuts  down  his  working  day,  his  working  week, 
^  Principles  of  Political  Economy,  Bk.  I,  chap,  vii,  §  3. 


LUXURY  335 

or  his  working  years.  To  him  leisure,  sport,  and  rest  are  luxuries. 
If  he  cares  more  for  these  than  for  such  additional  luxuries  of 
other  kinds  as  he  could  secure  by  working  longer,  he  will,  of  course, 
choose  these. 

Material  and  immaterial  luxuries.  It  is  true  that  by  choosing 
material  luxuries,  rather  than  the  immaterial  satisfaction  of  leisure 
and  rest,  the  quantity  of  material  goods  which  are  produced  and 
put  on  the  market  is  increased.  The  statistics  of  wealth  are  ex- 
panded. The  census  taker  and  the  tax  assessor  find  more  tangible 
articles  of  wealth  in  such  a  community  than  they  would  find  in  the 
community  which  preferred  to  take  its  luxury  in  the  form  of 
leisure.  It  happens  that  we  are  members  of  a  strenuous  race,  to 
whom  leisure  does  not  seem  very  desirable,  of  a  race  which  might 
be  malignly  characterized  as  a  greedy  or  a  gluttonous  race,  having 
powerful  desires  for  material  luxuries.  It  is  natural  for  us  to 
think  that  we  have  made  much  the  better  choice  when  we  take 
our  luxury  in  the  form  of  material  goods  rather  than  in  the  form 
of  rest.  We  are,  therefore,  much  inclined  to  despise  the  race 
which  chooses  idleness.  There  is  such  a  thing  as  a  pot  calling  a 
kettle  black. 

A  storehouse  of  labor.  There  is  an  argument,  however,  which 
goes  back  at  least  as  far  as  David  Hume,  to  the  effect  that  luxuries 
must  be  regarded  as  a  storehouse  of  labor  which  in  the  exigencies 
of  the  state  may  be  turned  to  the  public  service.  This  may  mean 
merely  that  a  community  which  is  expending  a  large  proportion 
of  its  energy  in  the  production  of  luxuries  may,  in  times  of  great 
crisis,  turn  that  surplus  energy  into  the  work  of  meeting  the  crisis. 
In  time  of  war,  for  instance,  the  consumption  of  luxuries  may  be 
cut  down,  and  the  productive  energy,  which  had  been  used  in  the 
production  of  luxuries,  may  then  be  used  in  the  prosecution  of 
the  war  or  in  the  manufacture  of  munitions  and  war  equipment. 
This  is  undoubtedly  a  sound  argument  so  far  as  it  goes. 

In  order  to  put  several  million  men  of  working  age  into  the 
army  and  nav\',  and  more  millions  into  the  munition  factories  and 
navy  yards,  and  others  into  the  mines  to  produce  the  raw  mate- 
rials, and  still  others  onto  the  farms  in  order  to  increase  the  food 


336  ELEMENTARY  ECONOMICS 

production,  it  is  absolutely  certain  that  labor  must  be  withdrawn 
from  some  source.  It  is  fairly  obvious  that  there  are  only  two 
sources  from  which  it  can  be  drawn.  They  who  are  not  working 
may  be  put  to  work,  and  those  who  are  doing  unnecessarj'^  kinds  of 
work  may  be  put  into  the  necessary  industries. 

Reducing  consumption  in  times  of  national  crisis.  If  every 
luxury-producing  industry  were  closed  down,  a  vast  quantity 
of  labor  would  be  released.  It  would  then  be  available  either  for 
military  purposes  or  for  the  production  of  the  necessaries  of  life. 
Our  golf  courses,  baseball  fields,  and  tennis  courts  could  be  trans- 
formed into  farms  and  gardens.  This  would  add  a  good  many 
acres  to  the  productive  land,  and,  what  is  vastly  more  important, 
the  players  as  well  as  the  spectators  could  be  used  in  productive 
work,  greatly  to  the  advantage  of  the  nation. 

These  changes  in  habits  may  profitably  go  much  farther.  The 
people  may  economize  greatly  in  their  consumption.  Starch,  in 
the  form  of  grain,  potatoes,  or  coarse  vegetables,  is  our  principal 
food.  To  this  must  be  added  a  very  moderate  amount  of  protein, 
fats,  and  sugar.  These,  however,  may  also  be  made  to  serve  the 
purpose  of  making  the  basic  starchy  food  more  palatable.  Fruits 
and  the  finer  vegetables  and  salads  should  be  made  to  serve  mainly 
as  relishes.  Instead,  many  of  us  make  our  meals  principally  of 
things  which  should  serve  as  condiments,  relishes,  and  delicacies, 
using  starchy  food  only  as  a  means  of  diluting  them. 

Rapid  recovery  after  a  local  disaster.  Even  in  cases  of  great 
local  disaster,  such  as  a  great  fire  or  earthquake,  it  has  been  re- 
marked many  times  that  recovery  comes  with  amazing  rapidity. 
In  spite  of  the  fact  that  vast  quantities  of  wealth  are  destroyed, 
the  city  soon  recovers  and  becomes  apparently  as  prosperous  as 
ever.  Luxury  is  supposed  by  some  to  have  an  important  bearing 
on  this  question.  The  energy  which,  before  the  disaster,  was 
spent  in  producing  luxuries  is  now  available  to  be  spent  in  rebuild- 
ing what  was  destroyed.  In  order  to  do  this,  however,  the  people 
must,  for  a  time  at  any  rate,  reduce  their  consumption  of  luxuries. 
The  individual  whose  property  has  been  destroyed  is  to  that  ex- 
tent poorer  than  he  was  before.    He  may  borrow  capital  with 


LUXURY  337 

which  to  rebuild,  but  until  the  debt  is  paid  off,  his  effective  in- 
come is  considerably  reduced.  He  therefore  has  less  money  to 
spend  on  articles  of  luxury ;  he  is  virtually  spending  that  money 
on  a  new  building. 

The  objection  may  be  raised  that  the  luxury  which  takes  the 
form  of  leisure  would  also  furnish  a  fund  of  energy  for  the  meeting 
of  a  great  national  crisis  or  repairing  a  local  disaster.  Men  who 
have  remained  idle,  enjoying  leisure,  may  now  go  to  work  to  carry 
on  the  war  or  to  rebuild  the  city  which  has  been  partially  de- 
stroyed. This  objection  is  somewhat  weak,  however,  because,  in 
the  first  place,  habits  of  sloth  and  idleness  are  much  more  difficult 
to  overcome  than  habits  of  lavish  consumption.  The  sheer  inertia 
of  the  people  makes  it  almost  impossible  to  rouse  them  to  extra 
exertions  in  time  of  crisis,  whereas  the  people  who  have  been  exert- 
ing themselves  strenuously  in  the  production  of  articles  of  luxury 
may,  with  less  difficulty,  redirect  their  strenuous  energy.  In  a 
sense  the  productive  machinery  of  the  community  is  already  going. 
It  can  be  kept  going  and  its  direction  changed  more  easily  than  it 
can  be  started  up. 

In  the  second  place,  if  a  community  takes  its  luxury  in  the  form 
of  idleness,  it  is  certain  to  be  ill  equipped  with  the  machinery  of 
production  as  well  as  with  the  technical  knowledge  and  skill  which 
are  necessary  to  efficient  production.  If  it  lacks  machinery  and 
technical  knowledge  and  skill,  it  will  not  be  able  to  carry  on  a 
modern  war  successfully  or  to  repair  a  local  disaster  ;  whereas 
a  community  that  takes  its  luxury  in  the  form  of  material  goods 
will  have  learned,  in  the  process  of  production,  much  technical  skill 
and  will  have  accumulated  vast  funds  of  machinery  and  tools.  If 
there  is  anything  that  modern  warfare  has  taught,  it  is  the  su- 
periority in  war  of  the  nation  that  is  thus  equipped.  The  technical 
skill  and  the  machinery  which  are  accumulated  for  purposes  of 
production  may  easily  be  turned  to  the  purposes  of  destruction, 
and  in  war  the  community  that  is  best  equipped  for  the  work  of 
destruction  will  win. 

Reducing  the  rate  of  permanent  construction.  So  far  the 
argument  seems  conclusive  in  favor  of  material  luxury  as  against 


338  ELEMENTARY  ECONOMICS 

immaterial  luxury  in  the  form  of  leisure  and  idleness.  We  are  far, 
however,  from  a  complete  justification  of  luxury  in  the  ordinary 
sense.  The  community  that  is  in  the  habit  of  investing  its  money 
for  the  future  rather  than  of  buying  objects  of  immediate  grati- 
fication will  likewise  have  a  fund  of  surplus  energy  at  its  disposal. 
All  the  energy  which  has  been  devoted  to  permanent  construction 
for  the  future  good  of  society  may,  in  time  of  great  national  crisis 
or  local  disaster,  be  redirected  toward  meeting  the  crisis  or  re- 
pairing the  local  damage.  The  kind  of  skill  which  is  necessary  to 
permanent  construction  is  of  quite  as  high  an  order  as  the  kind 
which  is  necessary  to  the  production  of  luxurious  articles  of  con- 
sumption. All  the  advantages,  in  short,  which  a  luxurious  com- 
munity possesses  for  the  meeting  of  a  great  crisis  are  also  possessed 
by  the  thrifty  community  which  spends  a  good  portion  of  its  in- 
come in  durable  construction  and  in  building  for  future  generations. 

In  the  long  run  the  community  that  spends  a  large  portion  of  its 
energy  in  permanent  construction  will  have  certain  advantages 
over  the  community  that  consumes  luxuriously.  If  every  farmer, 
for  example,  should  put  back  into  his  farm  a  part  of  his  annual 
income,  in  the  way  of  improvement  of  the  soil,  in  ditching,  drain- 
ing, fencing,  and  building,  he  would  be  using  up  surplus  energy 
just  as  truly  as  he  would  be  if  he  spent  that  amount  of  money  in 
luxurious  consumption.  In  time  of  national  crisis  he  can  suspend, 
for  the  time,  further  building  and  improvements  on  his  farm  and 
have  energy  to  spare  for  the  production  of  more  food ;  or  he  can 
dispense  with  a  certain  amount  of  hired  help,  which  will  then  be 
available  for  government  purposes.  After  a  few  generations  the 
nation  whose  farmers  systematically  put  back  into  their  farms  a 
part  of  their  incomes  will  have  much  better  farms  and  much 
greater  productive  power  than  the  community  which  merely  keeps 
its  agricultural  wealth  intact  and  spends  the  surplus  in  luxurious 
consumption. 

That  which  applies  to  farms  applies  also  to  factories,  shops,  and 
all  other  productive  establishments.  The  community  which  is  in 
the  habit  of  adding  to  its  accumulated  wealth  in  each  generation 
by  investing  a  part  of  its  income  in  tools  and  instruments  for 


LUXURY  339 

future  production  will,  after  the  lapse  of  a  few  generations,  be 
vastly  stronger  than  the  community  which  merely  keeps  its  pro- 
ductive power  intact  and  consumes  all  its  income. 

The  luxurious  consumption  of  material  articles  is  doubtless  very 
much  better  than  the  luxurious  enjoyment  of  leisure  —  that  is,  it 
is  better  to  exercise  our  energy  and  ingenuity  in  producing  luxuries 
than  to  be  lazy  and  idle ;  but  it  is  still  better  to  exercise  that 
energy  and  ingenuity  in  building  for  future  generations,  in  adding 
every  year  to  the  productive  power  of  the  nation  or  to  the  re- 
sources of  civilization.  To  do  these  things  it  will  be  necessary  to 
add  the  virtues  of  thrift  and  forethought  to  those  of  industry  and 
ingenuity.  Through  the  combination  of  all  these  virtues  we  shall 
do  better  than  through  a  part  of  them.  He  who  does  less  well 
than  he  can,  does  ill.  He  who  consumes  useless  luxuries  when  he 
might  invest  productively  is  doing  less  well  than  he  can. 

EXERCISES 

1.  How  should  you  define  luxuries? 

2.  How  should  you  define  necessaries  ? 

3.  How  should  you  define  comforts? 

4.  How  should  you  define  decencies  ? 

5.  What  is  the  distinction  between  material  and  immaterial  luxuries  ? 

6.  In  what  sense  is  luxury  a  storehouse  of  labor? 

7.  Why  do  modern  communities  recuperate  so  rapidly  after  wars 
and  other  disasters? 

8.  Which  is  better  for  a  nation,  to  take  its  luxuries  in  the  form  of 
material  goods  or  in  the  form  of  idleness  or  leisure? 

9.  Which  is  a  better  way  of  using  up  surplus  energy,  in  luxury  or 
in  durable  construction? 


CHAPTER  XLI 
THE  CONTROL  OF  CONSUMPTION 

Difficulty  of  suppressing  luxury.  We  saw  in  the  last  chapter 
that  luxurious  consumption  is  less  desirable  from  the  national 
standpoint  than  thrift,  forethought,  and  the  investment  of  surplus 
income  in  the  enlargement  of  industries  and  in  buying  objects  of 
durable  satisfaction.  The  difficult  question  is  to  know  what  to  do 
about  it.  It  is  easy  to  demand  that  the  government  should  re- 
press luxury,  but  it  is  not  so  easy  for  the  government  to  do  it.  One 
of  the  first  difficulties  is  that  of  defining  luxurious  objects.  There 
are  not  many  objects  whose  uses  are  wholly  luxurious.  Coal  in 
certain  quantities  is  a  necessity,  but  it  may  be  consumed  in 
luxurious  quantities.  The  same  may  be  said  of  most  kinds  of 
food  and  clothing.  Again,  that  which  is  a  luxury  to  one  may  be 
a  necessity  to  another. 

Another  difficulty  is  found  in  the  probability  that  the  repression 
of  luxurious  consumption  might  lead  to  sloth  and  inaction.  To 
prohibit  the  consumption  of  articles  of  luxury  might  very  easily 
take  away  the  motive  to  industry.  If  the  people  cannot  have  ex- 
pensive commodities,  they  may  take  their  luxury  in  the  form  of 
leisure,  idleness,  and  self-amusement.  This,  as  we  saw  in  the  last 
chapter,  is  even  less  desirable  than  luxurious  consumption.  An 
increase  of  wants  sometimes  has  the  effect  of  overcoming  the  tend- 
ency to  sloth  and  idleness.  If  the  government  should  make  it 
impossible  for  men  to  gratify  these  increased  wants,  it  would 
merely  drive  them  back  into  sloth  and  idleness.  This  could  only 
be  counteracted  by  other  laws  compelling  them  to  work. 

Legislative  control  not  always  effective.  One  of  the  last 
things  that  we  learn  regarding  legislation  is  that  is  usually  takes 
a  large  number  of  new  legislative  acts  to  correct  or  counteract  the 
unlooked-for  results  of  any  legislative  act. 

340 


THE  CONTROL  OF  CONSUMPTION  341 

Another  objection  to  legislative  attempts  to  suppress  luxurious 
consumption  is  the  one  pointed  out  by  Adam  Smith  and  others,  to 
the  effect  that  when  their  habits  of  life  are  fixed,  men  and  women 
will  frequently  give  up  the  necessaries  of  life  before  they  will  give 
up  luxuries.  This  applies  especially  to  the  attempts  to  make 
luxuries  expensive  by  taxing  them.  When  they  become  very  ex- 
pensive, some  people  will  insist  on  having  them,  even  if  it  takes 
their  whole  income  to  buy  them  and  leaves  them  little  for  the 
necessaries  of  life. 

Voluntary  frugality.  These  arguments,  it  will  be  noticed,  are 
based  upon  the  inefficiency  of  sumptuary  laws  rather  than  upon 
any  more  fundamental  objection  to  them.  In  general  they  seem  to 
produce  results  which  are  worse  than  the  thing  they  try  to  cure. 
Nothing  whatever  can  be  said,  however,  against  a  voluntary  fore- 
going of  luxuries  and  a  rationalizing  of  standards  of  living  on  the 
part  of  the  people  themselves.  It  is  one  thing  for  the  people  to 
want  the  right  things ;  it  is  quite  a  different  thing  to  try  to  force 
them  to  consume  the  right  things  whether  they  want  them  or  not. 
It  is  one  thing  for  the  people  voluntarily  to  give  up  luxuries ;  it 
is  quite  a  different  thing  to  compel  them  by  law  to  do  so,  whether 
they  are  willing  or  not. 

Control  of  vice  is  "sumptuary  legislation."  In  some  extreme 
cases,  however,  a  luxury  becomes  so  extremely  demoralizing  and 
dangerous  to  society  as  to  justify  government  regulation  or  sup- 
pression. There  may  be  undesirable  results  of  such  legislation, — 
there  are  pretty  sure  to  be ;  but  if  these  undesirable  results  are 
less  undesirable  than  the  thing  which  is  suppressed,  there  is  a  net 
gain.  Regulation  or  suppression  of  vice  of  all  kinds  is  sumptu- 
ary legislation.  If  the  vicious  habit  or  the  vicious  form  of  con- 
sumption is  sufficiently  injurious,  its  suppression  is  justifiable, 
even  though  some  undesirable  results  may  follow. 

There  are,  however,  a  good  many  sentimental  objections  to 
sumptuary  laws  which  have  no  connection  with  the  real  objections. 
We  are  all  consumers ;  and  if  the  government  begins  regulating 
consumption  we  are  each  of  us  likely  to  come  in  for  a  certain 
amount  of  regulation.    We  are  rather  impatient  of  all  kinds  of 


342  ELEMENTARY  ECONOMICS 

regulation  when  it  is  applied  to  ourselves,  though  we  may  be  very 
patient  of  the  regulation  of  other  people,  as  we  are  patient  in  the 
contemplation  of  other  people's  troubles.  We  are  not  all  of  us 
in  the  banking  or  the  railroad  business,  and  do  not  feel  in  danger 
when  the  government  undertakes  to  regulate  those  and  other 
special  lines  of  business. 

No  essential  difference  between  controlling  business  and  con- 
trolling consumption.  This  consideration  has  led  to  quasi-serious 
attempts  to  draw  a  sharp  distinction  between  the  regulation  or 
control  of  business  and  the  regulation  or  control  of  consumption. 
But  all  such  distinctions  are  trivial.  Habits  of  consumption,  as 
stated  above,  are  quite  as  important  to  the  welfare  of  the  nation 
as  methods  of  doing  business.  To  attempt  to  regulate  or  control 
either  is  certain  to  produce  undesirable  results.  Nevertheless, 
where  the  evils,  either  of  unregulated  consumption  or  of  unregu- 
lated business,  are  great  enough  we  must  have  regulation  and  take 
our  chances  with  the  evils  and  difficulties  of  regulation. 

Whenever  a  nation  is  facing  a  great  crisis  in  its  history,  when 
its  strength  and  endurance  are  being  put  to  a  severe  test,  when,  in 
short,  it  is  fighting  for  its  life  as  a  nation,  the  people  are  forced 
to  think  in  terms  of  national  life  rather  than  in  terms  of  individual 
life.  At  such  times  the  people  find  it  just  as  necessary  that  the 
government  shall  regulate  consumption  as  that  it  shall  regulate 
production.  They  also  find  that  freedom  of  speech  is  not  more 
sacred  or  inviolable  than  freedom  of  running  a  business.  Com- 
pulsion is  likely  to  apply  in  all  fields  of  activity,  not  simply 
in  the  field  of  production  and  business  management,  of  transpor- 
tation and  food  distribution,  but  also  in  the  field  of  consumption 
and  even  in  the  field  of  selling  talk  for  a  profit. 

Luxurious  consumption  does  not  increase  the  demand  for 
labor.  There  can  be  no  doubt,  however,  that  luxurious  consump- 
tion is  in  itself  an  injury  to  the  public,  and  particularly  to  the 
laboring  classes,  however  inexpedient  it  might  be  for  the  govern- 
ment to  use  its  power  of  compulsion  to  prohibit  luxury.  There  is 
an  ancient  and  nauseous  fallacy  which  says  that  the  extravagance 
of  the  rich  gives  employment  to  the  poor.   Nothing  could  be 


THE  CONTROL  OF  CONSUMPTION  343 

farther  from  the  truth.  The  extravagance  of  the  rich  gives  much 
less  employment  to  the  poor  than  the  accumulation  and  investment 
by  the  rich  in  various  kinds  of  productive  industry.  The  individual 
who  buys  extravagantly  does,  of  course,  set  labor  to  work  pro- 
ducing the  objects  of  extravagance,  but  the  individual  who  in- 
vests largely  also  sets  labor  to  work  producing  the  buildings,  tools, 
etc.  in  which  he  invests.  In  addition  to  this  he  adds  definitely  to 
the  productive  power  of  the  community.  Furthermore,  labor  must 
be  hired  to  make  use  of  the  buildings  and  the  tools,  and  there  is  a 
larger  social  product  out  of  which  to  pay  wages.  Comparatively 
speaking,  therefore,  the  extravagance  of  the  rich  takes  away  from 
the  employment  of  the  poor.  From  that  point  of  view  extrava- 
gant consumption  is  a  social  injury. 

Leisure  versus  luxury.  If,  as  suggested  above,  there  were  no 
unlooked-for  results  from  the  suppression  of  extravagance,  the 
state  would  be  fully  justified  in  suppressing  it ;  but  if  the  suppres- 
sion of  extravagance  merely  produced  leisure  and  idleness,  instead 
of  extravagance,  more  harm  than  good  would  be  done.  We  must 
conclude,  therefore,  that  where  a  form  of  consumption  has  become 
so  definitely  vicious  and  injurious  to  the  rest  of  society  as  to  pro- 
duce more  hann  than  would  probably  result  from  compulsory  sup- 
pression, then  suppression  must  be  justified.  But  where,  even 
though  it  be  harmful,  it  is  not  more  harmful  than  other  results 
which  would  probably  follow  from  its  suppression,  then  suppres- 
sion is  not  justifiable.  It  must  be  remembered,  however,  that  laws 
suppressing  vice  are  in  a  sense  sumptuary  laws.  The  only  differ- 
ence between  these  and  other  sumptuary  laws  lies  in  the  fact  that 
the  forms  of  consumption  which  they  attempt  to  regulate  or  sup- 
press meet  with  such  general  disapproval  as  to  make  their  suppres- 
sion popular,  whereas  in  other  cases  the  forms  of  consumption  are 
not  universally  condemned  and  therefore  their  suppression  is  not 
generally  approved. 

Rationing  the  people.  That  school  of  social  philosophers  who 
hold  that  all  forms  of  competition  are  inherently  evil,  and  that 
therefore  government  compulsion  and  general  regulation  should 
be  made  use  of  to  stop  competition,  would,  if  they  were  consistent. 


344  ELEMENTARY  ECONOMICS 

desire  to  begin  with  sumptuary  regulations.  As  stated  in  a  previous 
chapter,  there  are  three  main  forms  of  economic  competition, — 
competitive  production,  competitive  bargaining,  and  competitive 
consumption, — and  of  these  three,  competitive  consumption  is 
infinitely  worse  than  either  of  the  others.  By  an  authoritative 
standardization  of  wearing  apparel,  food,  and  other  forms  of  con- 
sumption we  should  tend  to  eliminate  this  worst  form  of  competi- 
tion. That  would  involve,  of  course,  the  organization  of  society 
on  a  semimilitary  basis,  though  the  object  need  not  be  military 
conflict.  It  would  mean  the  prescribing  of  a  satisfactory  uniform 
for  all  members  of  the  community  and  also  of  a  uniform  diet  or 
ration.  Houses,  furniture,  and  other  consumable  goods  would  also 
have  to  be  standardized  and  prescribed  by  government  regulations. 

There  is  no  doubt  whatever  that  if  the  people  would  accept  this 
kind  of  regimentation  and  work  cheerfully  under  it,  as  they  prob- 
ably would  not,  we  should  prevent  the  waste  of  a  vast  amount 
of  energy  and  avoid  many  petty  jealousies  and  heartburnings. 
Academic  costume,  whatever  may  be  said  against  it  on  other 
grounds,  has  the  advantage  of  saving  academicians  a  great  deal  of 
perplexity  over  the  question  "Wherewithal  shall  we  be  clothed?" 
The  costumes  and  vestments  of  certain  religious  orders  answer  the 
same  purpose.  There  are  also  many  religious  sects,  of  which 
the  Quakers  of  the  old  school  were  a  good  illustration,  which 
succeeded  in  saving  their  people  from  that  destructive  form  of 
competition  which  strives,  first,  to  outshine  one's  neighbors  in 
matters  of  dress,  and,  second,  not  to  be  outshone  by  one's 
neighbors. 

In  a  time  of  great  national  crisis  we  have  many  illustrations  of 
what  people  may  accomplish  in  the  way  of  economy  and  effort  by 
putting  the  whole  nation  on  a  fixed  ration  and  also  by  prescribing 
the  manner  of  dress  of  each  class  in  the  nation.  If  the  people 
would  submit  cheerfully  to  similar  regulations  in  time  of  peace,  all 
the  vast  energy  which  in  time  of  war  is  devoted  to  the  work  of 
destruction  could  then  be  turned  to  the  work  of  production,  and 
industrial  progress  could  proceed  at  a  stupendous  rate.  It  is  not 
impossible  that  at  some  time  in  the  future  there  may  be  a  real 


THE  CONTROL  OF  CONSUMPTION  345 

effort  on  the  part  of  certain  ambitious  nations  to  economize  their 
energy  in  this  way  in  order  that  they  may  increase  their  strength 
rapidly  in  preparation  for  Armageddon. 

EXERCISES 

1.  Granting    that    luxurious    consumption   is    undesirable,    does    it 
necessarily  follow  that  the  government  should  repress  it  ? 

2.  Is  there  any  essential  difference  between  controlling  business  and 
controlling  consumption  ? 

3.  Does  luxurious  consumption  increase  or  decrease  the  demand  for 
labor  ? 

4.  Would  it  be  economical  if  everybody  would  voluntarily  standard- 
ize his  or  her  clothes  ? 

5.  Would  it  necessarily  be  economical  if  the  government  should 
compel  us  all  to  wear  standardized  costumes  as  uniforms  ? 


CHAPTER  XLII 
THE  BATTLE  OF  THE  STANDARDS 

Efficient  versus  cheap  standards  of  living.  Where  people  who 
are  equally  industrious,  intelligent,  and  capable  are  competing, 
the  advantage  in  the  long  run  will  be  on  the  side  of  the  most 
thrifty.  If  they  earn  equal  amounts  in  the  present,  the  thrifty 
people  will  invest  a  part  of  their  earnings  so  that,  in  the  future, 
they  will  have  larger  incomes  than  the  unthrifty. 

This  has  sometimes  led  to  the  erroneous  conclusion  that  a  cheap 
standard  of  living  would  always  drive  out  an  expensive  standard, 
merely  because  the  cheap  standard  has  greater  competing  power. 
It  is  asserted  that  people  who  are  willing  to  live  and  multiply  on 
a  very  small  income  will  always  tend  to  displace  those  who  are 
unwilling  to  live  and  multiply  except  on  a  liberal  income.  If  sheep 
and  cattle  are  allowed  to  multiply  and  wander  at  will  over  the 
Western  ranges,  it  is  plain  that  the  sheep  will  drive  out  the  cattle, 
not  because  they  are  superior  in  value  or  in  fighting  power  but 
merely  because  they  are  able  to  nibble  closer  to  the  ground  and 
to  live  where  cattle  would  starve.  A  similar  law  appears  to  operate 
throughout  the  human  as  well  as  the  animal  world.  Those  who 
can  live  on  the  least  seem  at  times  able  to  drive  out  all  others  by 
eating  them  out  of  house  and  home. 

It  must  be  confessed  that  there  are  some  facts  which  seem  to 
support  this  conclusion.  The  American  laborers  on  the  Pacific 
coast  find  it  very  difficult  to  compete,  at  least  in  the  unskilled 
trades,  with  the  Chinese  and  the  Japanese.  On  the  Atlantic  sea- 
board employers  of  labor  have  been  able  to  tap  various  reservoirs 
of  cheap  labor,  first  in  northwestern  Europe,  later  in  southern  and 
eastern  Europe.  These  laborers,  having  been  accustomed  to  very 
small  incomes,  are  able  and  willing  to  work  and  multiply  on  in- 
comes so  small  as  to  drive  out,  at  once  or  ultimately,  either  the 

346 


THE  BATTLE  OF  THE  STANDARDS 


347 


American  laborers  or  the  immigrant  laborers  of  a  previous  immi- 
gration. The  later  immigrants  drive  the  earlier  immigrants  out 
directly  by  accepting  lower  wages  than  the  earlier  immigrants  are 
willing  to  accept ;  they  drive  them  out  indirectly  by  multiplying 
rapidly  and  thus  supplying  a  new  stock  of  labor  where  the  others 
would  refuse  to  multiply. 

In  many  farming  communities  it  is  found  likewise  that  foreign- 
born  farmers,  who  are  willing  to  live  on  less  than  the  American- 
born  farmers,  can,  if  necessary,  pay  either  a  rent  or  a  price  for 
land  which  would  bankrupt  the  American  farmer  with  his  higher 
cost  of  living.  Thus  the  land  tends  to  pass  into  the  hands  of  those 
farmers  with  the  cheap  standard  of  living.  On  the  Pacific  coast, 
again,  the  same  tendency  shows  itself.  The  Chinese  and  Japanese 
farmers  and  gardeners  are  able  to  buy  or  rent  land  and  pay  a  price 
which  an  American  farmer  with  his  higher  standard  of  living 
would  find  impossible. 

A  cheap  standard  does  not  always  drive  out  an  expensive 
standard.  It  must  be  pointed  out,  however,  that  not  every  people 
with  a  low  standard  of  living  has  high  competing  power.  The 
Mexican  peons  have  as  cheap  a  standard  of  living  as  the  Chinese 
coolies,  and  yet  they  do  not  compete  successfully  even  with  Amer- 
icans, who  have  a  higher  standard  of  living.  In  other  words,  there 
must  be  coupled  with  a  cheap  standard  of  living  considerable  in- 
dustrial efficiency.  With  equal  industrial  efficiency,  the  race  with 
a  cheaper  standard  of  living  seems  to  have  the  advantage  in 
economic  competition.  On  the  other  hand,  with  an  equal  standard 
of  living,  the  race  with  the  higher  industrial  efficiency  has  the  same 
advantage  in  economic  competition.  In  fact,  we  find  that  even 
with  a  more  expensive  standard  of  living,  the  race  whose  industrial 
efficiency  expands  in  proportion  to  its  cost  of  living  holds  its 
advantage  in  economic  competition. 

Competing  power  is  equal  to  production  minus  consumption. 
This  brings  us  back  to  the  formula  which  was  used  in  a  previous 
chapter  to  express  the  value  of  a  man :  V  =  P  —  C.  The  value  of  a 
man  is  equal  to  his  production  minus  his  consumption.  By  his 
value  we  mean  his  value  to  his  race  or  nation.   That  which  he  adds 


348  ELEMENTARY  ECONOMICS 

to  the  total  resources  of  his  nation  in  excess  of  what  he  extracts 
from  those  resources  is  his  net  contribution  to  the  strength  of  the 
nation.  The  nation  will  be  strongest,  in  the  long  run,  whose  aver- 
age citizen  has  the  highest  value  in  this  sense.  That  nation  will  be 
weakest,  in  the  long  run,  whose  average  citizen  has  the  lowest 
value  in  this  sense.  But  that  citizen's  value  may  be  increased,  not 
simply  by  reducing  his  consumption  but  by  increasing  the  differ- 
ence between  his  consumption  and  his  production.  Adding  to  his 
production  is  just  as  essential  as  keeping  his  consumption  within 
efficient  bounds. 

If  we  seek  a  formula  which  will  express  the  competing  power 
of  a  whole  nation,  it  must  be  very  closely  related  to  the  formula 
which  expresses  the  value  of  one  of  its  citizens.  The  formula  is 
CP  —P  —  C;  that  is,  the  competing  power  of  a  nation  is  equal  to  its 
production  minus  its  consumption.  The  nation  or  the  race  in 
which  there  is  the  widest  margin  between  production  and  con- 
sumption will  win  in  economic  competition  against  all  comers.  If 
the  American  farmer  were  enough  more  efficient  as  a  producer  than 
the  foreign-born  farmer  to  compensate  for  his  higher  cost  of  living, 
he  could  hold  his  own  indefinitely  in  economic  competition. 

It  is  not,  therefore,  the  cheap  standard  of  living  which  invariably 
wins ;  it  is  the  efficient  standard  of  living.  A  race  with  an  expen- 
sive standard  of  living,  provided  every  dollar  of  expense  adds 
something  to  its  productive  efficiency,  will  always  win  in  competi- 
tion with  a  race  with  a  cheap  standard  of  living.  If,  however,  the 
expensive  standard  is  made  expensive  merely  by  the  demand  for 
luxuries  and  means  of  dissipation,  the  race  is  hopelessly  handi- 
capped and  ultimately  must  lose  in  competition  with  other  races. 
But  if  the  cost  of  living  is  made  high  by  the  demand  for  strength- 
giving  food  and  recreation,  for  means  of  mental  stimulation,  or 
for  books,  instruments  of  precision,  and  other  means  of  technical 
education,  such  a  standard  of  living  may  increase  the  margin  be- 
tween production  and  consumption  rather  than  diminish  it.  In 
that  case  not  only  can  the  race  possessing  such  a  standard  of  living 
hold  its  own  in  competition  at  home  but  the  members  of  that  race 
can  go  anywhere  in  the  world  and  hold  their  own  in  competition 


THE  BATTLE  OF  THE  STANDARDS  349 

with  the  natives.  Such  a  race  will  be  an  expanding,  colonizing 
race, — wherever  its  members  plant  themselves  they  will  succeed 
and  remain ;  whereas,  if  their  standard  of  living  is  merely  expen- 
sive without  being  efficient,  they  are  likely  to  fail  as  colonizers.  If 
Americans  develop  an  efficient  standard  of  living  they  will  make 
American  soil  wherever  they  plant  the  soles  of  their  feet. 

International  competition.  A  race  with  a  high  but  inefficient 
standard  of  living  sometimes  finds  it  necessary  to  protect  itself, 
at  least  within  its  own  boundaries,  against  the  competition  of 
races  with  a  cheaper  but  more  efficient  standard.  Otherwise  they 
would  find  themselves  ultimately  dispossessed  even  of  their  land. 
The  race  with  the  cheaper  and  more  efficient  standard  would  not 
only  get  the  jobs  in  industry  but  would  eventually  buy  the  farms 
and  the  businesses  at  prices  which  the  natives  would  be  unable  to 
pay.  The  natives  would  give  way  before  such  a  race  as  inevitably 
as  before  an  army  equipped  with  superior  weapons  of  offense. 

Moreover,  the  problem  is  not  solved  by  the  mere  exclusion  from 
our  own  territory  of  races  with  a  cheaper  and  more  efficient 
standard  of  living.  The  conflict  is  merely  changed  to  another  field, 
and  the  outcome  postponed  to  a  more  remote  period  of  time. 
International  competition  is  just  as  real  as  individual  competition 
within  the  nation,  though  it  does  not  seem  so  real  to  the  average 
person.  In  the  competition  for  the  markets  of  the  world  the  nation 
with  the  cheaper  and  more  efficient  standard  will  have  the  same 
advantage  as  it  would  have  in  getting  jobs  or  in  buying  farms  and 
businesses  within  the  confines  of  a  given  country. 

The  race  with  the  expensive  or  inefficient  standard  may  hold 
certain  advantages  because  of  the  peculiarities  of  its  geographical 
situation.  If  it  possesses  superior  soil  or  superior  mineral  deposits, 
these  physical  advantages  may  compensate,  in  part  at  least,  for 
the  inefficiency  of  its  standard  of  living  and  enable  it  to  survive 
in  international  competition.  Superior  mineral  deposits,  however, 
must  ultimately  be  exhausted.  Superior  soil  can  be  maintained 
only  by  wise  management.  The  nation  that  depends  upon  these 
material  advantages  for  its  future  strength  in  international  com- 
petition must  look  well  to  its  problems  of  conservation.    If  it  does 


350  ELEMENTARY  ECONOMICS 

not,  eventually  it  will  lose  these  advantages,  and  then  its  more 
expensive  standard  of  living  will  place  it  under  a  severe  handicap. 
Though  it  need  not  necessarily  perish  as  a  nation,  at  best  it  will 
live  at  a  "poor  dying  rate." 

Even  under  conditions  of  international  peace,  here  is  a  form  of 
international  rivalry  which  will  still  persist  and  under  which  the 
victory  must  ultimately  go  to  the  race  or  the  nation  with  the  most 
efficient  standard  of  living ;  that  is,  to  the  race  or  nation  in  which 
the  production  of  the  average  person  exceeds  his  consumption  by 
the  widest  margin. 

The  real  Armageddon.  Here  is  a  real  Armageddon,  the  battle- 
field of  the  nations — the  place  for  the  ultimate  contest  for  su- 
premacy among  the  various  races  and  nations  of  the  earth.  This 
is  the  field  where  sooner  or  later  every  nation  in  the  world  must 
be  brought  to  the  test  and  made  to  battle  for  its  very  existence. 
It  is  a  peaceful  contest,  but  none  the  less  deadly  on  that  account. 
Preparedness  for  this  ultimate  and  decisive  conflict  will  consist 
in  the  study  of  standards  of  living  and  the  adoption  of  such 
standards  and  habits  as  increase  productive  efficiency  to  the 
maximum  and  reduce  the  cost  of  living  to  the  lowest  point  which 
is  consistent  with  maximum  productivity.  In  the  interest  of  this 
form  of  preparedness  it  will  be  well  for  us  to  ponder  the  advice 
of  Pythagoras  to  his  son :  "  Choose  those  habits  which  are  best ; 
custom  will  make  them  the  most  agreeable." 

EXERCISES 

1.  What  is  meant  by  an  efficient  standard  of  living?  Is  it  the 
same  thing  as  a  cheap  standard? 

2.  Does  a  cheap  standard  of  living  always  drive  out  an  expensive 
standard  ? 

3.  How  will  the  efficiency  of  a  nation's  standard  of  living  affect  its 
success  in  international  competition? 


PART  SEVEN.    REFORM 


Programs 
OF  Reform 


CHAPTER  XLIII 
COMMUNISM 

{Communism 
Socialism 
The  single  tax 
C  Philosophical 
■{  Anarchistic-^  Exaggerated  egoism 
[Emotional 
Liberal  (the  equalization  of  bargaining  power  under  the  sys- 
tem of  voluntary  agreement  among  free  citizens) 

Compulsion  versus  freedom.  The  schemes  for  the  improve- 
ment of  social  conditions  fall  into  two  general  classes :  first,  those 
which  rely  upon  the  compulsory  power  either  of  a  benevolent 
despot  or  of  the  mass  over  the  individual ;  and,  second,  those 
which  rely  upon  voluntary  work  by  individuals  under  the  prin- 
ciple of  free  contract.  Among  those  which  rely  upon  the  authority 
of  the  mass  or  group  over  the  individual,  communism  is  the  most 
extreme.  It  is  sometimes  called  cooperation,  but  it  is  compulsory 
cooperation  as  distinguished  from  voluntary  cooperation.  The 
compulsion  is  made  complete  by  the  fact  that  the  community,  or 
the  group,  owns  all  the  property  and  the  individual  owns  none. 
All  the  processes  of  production  and  distribution  are  carried  on  by 
the  community  as  a  whole  rather  than  by  individual  initiative  and 
voluntary  agreements  among  individuals. 

Meaning  of  communism.  Communism  may,  therefore,  be  de- 
fined as  a  type  of  social  organization  in  which  all  wealth,  including 
both  producers'  goods  and  consumers'  goods,  is  owned  and  con- 
trolled by  the  community.  It  differs  from  socialism  in  that  the 
latter  proposes  that  the  community  shall  own  and  operate  only 
producers'  goods,  leaving  the  consumers'  goods  to  be  owned  and 
enjoyed  by  individuals.    A  completely  communistic  society,  for 

353 


354  ELEMENTARY  ECONOMICS 

example,  would  own  the  dwelling  houses  and  even  the  food  and 
clothing,  but  would  distribute  these  to  the  individual  members 
very  much  as  they  are  now  distributed  within  the  small  group 
which  we  call  the  family. 

Relation  to  anarchism.  Theoretically  communism  would  be  at 
the  opposite  end  of  the  scale  from  anarchism,  which  is  an  absence 
of  all  government, —  at  least  the  absence  of  all  compulsory  gov- 
ernment. In  actual  fact,  however,  it  is  not  always  easy  to  dis- 
tinguish between  a  communist  and  an  anarchist,  as  there  is  a 
considerable  group  of  individuals  who  call  themselves  anarchist- 
communists  ;  that  is,  they  are  opposed  to  any  kind  of  government 
which  resembles  those  with  which  we  are  now  acquainted.  They 
would  substitute  small  communistic  groups,  each  one  working 
more  or  less  independently  of  the  others  and  making  such  vol- 
untary arrangements  for  exchange  of  products  as  they  might  find 
to  their  mutual  advantage.  In  so  far  as  they  would  oppose  all 
compulsion  they  would  be  called  anarchists ;  in  so  far  as  they 
would  have  all  wealth  owned  in  common,  at  least  within  small 
groups,  they  would  be  called  communists.  Unless,  however,  the 
small  group  could  exercise  some  compulsory  control  over  the 
property  of  the  group  it  would  be  anarchism  rather  than  com- 
munism. If  the  group  did  exercise  orderly  control  over  its  own 
property  to  the  exclusion  of  individuals  and  rival  groups,  it 
would  be  compelled  to  exercise  compulsion  and  would  therefore,  to 
that  extent,  cease  to  be  anarchistic  and  become  purely  communistic. 

Utopias.  Naturally  enough  communism  has  never  been  tried 
on  a  large  scale,  though  there  have  been  many  small  experiments. 
It  has  been  advocated  by  many  philosophers,  both  ancient  and 
modern.  Many  pictures  have  been  drawn  of  ideal  societies  in 
which  communism  was  the  outstanding  feature.  Plato,  in  his 
"Republic,"  pictured  such  an  ideal  commonwealth.  Not  only  was 
all  wealth  to  be  held  in  common  but  wives  and  children  likewise. 
Defective  children,  or  children  who  seemed  likely  to  be  a  burden 
rather  than  a  help  to  the  state,  were  to  be  disposed  of  in  early  in- 
fancy. Sir  Thomas  More,  in  his  "Utopia,"  presented  another  pic- 
ture of  an  ideal  society  based  upon  communism.    In  order  to  give 


COMMUNISM  355 

an  impression  of  reality  he  pictured  some  travelers  in  South 
America  who  had  discovered  a  new  country,  in  which  communism 
prevailed,  Francis  Bacon  gave  us  a  somewhat  fragmentary  picture 
of  his  ideal  of  society  in  his  "  New  Atlantis,"  Tommaso  Campanella, 
in  "The  City  of  the  Sun,"  and  various  other  writers  have  kept 
alive  the  ideal  of  a  communistic  society.  In  more  recent  times  we 
have  such  books  as  "News  from  Nowhere,"  by  William  Morris; 
"The  Cooperative  Commonwealth  in  its  Outlines,"  by  Laurence 
Gronlund;  and  "Looking  Backward,"  by  Edward  Bellamy.  This 
is  a  list  of  distinguished  writers,  and  their  books  make  attractive 
reading.  They  show  pretty  clearly  how  persistently  the  world  has 
dreamed  of  social  conditions  in  which  there  should  be  no  rivalry 
of  interests,  no  quarreling  and  bickering  over  questions  of  prop- 
erty,— of  mine  and  thine. 

It  is  not  very  difficult  to  show  where  these  pictures  are  defective 
and  how  impractical  such  schemes  of  social  organization  are. 
The  world  at  large,  or  at  least  a  great  majority  of  the  people  of 
the  world,  has  put  very  little  confidence  in  these  proposals ;  but 
probably  no  generation  has  been  without  a  certain  number  of 
spirits  who  have  retained  their  belief  in  those  peculiar  ideals  of 
justice  and  economy  which  these  Utopian  works  have  set  forth. 

Experiments:  the  primitive  Christians.  Nor  have  actual  ex- 
periments been  wanting.  The  primitive  Christian  Church  is  fre- 
quently referred  to  as  an  example  of  communism.  One  or  two 
passages  in  the  Acts  of  the  Apostles  indicate  that  the  first  Chris- 
tians, at  least,  maintained  a  communistic  fund  for  the  maintenance 
of  impecunious  members.  For  a  short  time  they  appear  to  have 
put  practically  all  of  their  possessions  into  a  common  fund.  It 
will  also  be  noticed  that  they  not  only  put  their  possessions  into  a 
common  fund  but  they  stopped  working  and  remained  together 
in  one  place,  awaiting  the  second  coming  of  the  Lord.  This  makes 
it  appear  as  though  communism  were  not  with  them  an  ideal 
scheme  of  social  organization,  but  merely  a  convenient  arrange- 
ment by  means  of  which  they  could  live  while  preparing  for  the 
end  of  the  world  and  their  sudden  translation  to  heaven.  They 
soon  went  back  to  work  and  forgot  their  communism. 


356  ELEMENTARY  ECONOMICS 

The  Spartans.  The  Spartan  commonwealth  is  likewise  re- 
ferred to  as  a  communistic  society.  According  to  the  account 
given  in  Plutarch's  ''Life  of  Lycurgus,"  there  were  many  com- 
munistic features  about  the  life  of  the  Spartans.  It  appears  to 
have  been  the  communism  of  a  military  camp,  however,  for  the 
Spartans  themselves  were  only  a,  small  clan,  or  caste,  ruling  over 
a  much  larger  population  of  subject  people.  In  order  that  they 
might  be  strong  in  a  military  sense,  and  hold  the  masses  of  the 
people  in  subjection,  they  organized  themselves  very  much  as  a 
military  camp  has  always  been  organized.  There  was  no  com- 
munism whatever  for  the  mass  of  the  people.  It  extended  only  to 
the  small  aristocratic  and  ruling  class  called  Spartans. 

The  monasteries.  Most  of  the  monasteries  of  the  Middle  Ages 
were  organized  on  a  communistic  basis.  They  also  practiced  celi- 
bacy, showing  that  they  did  not  regard  communism  as  the  ideal 
basis  of  a  continuing  human  society.  The  whole  monastic  life  was 
organized  for  the  purpose  of  promoting  spirituality  rather  than 
for  the  purpose  of  reforming  human  society. 

The  Taborites.  Certain  extreme  sects  among  the  early  Prot- 
estants attempted  some  kind  of  communistic  life  without  celibacy, 
but  never  made  much  of  a  success.  Conspicuous  among  these 
were  the  Taborites,  an  extreme  faction  of  the  followers  of  John 
Huss,  the  Bohemian  reformer.  They  withdrew  from  the  city  of 
Prague  and  started  a  community  on  a  hill  to  which  they  gave  the 
name  of  "Mount  Tabor."  They  hence  became  known  as  the 
Taborites.  So  long  as  they  were  thoroughly  united  by  their  re- 
ligious sentiments  they  worked  very  successfully,  not  only  in  pro- 
ductive industry  but  even  in  war,  for  the  great  Austrian  Empire 
sent  army  after  army  against  them.  They  defeated  the  imperial 
armies  because  of  the  superiority  of  their  organization.  But 
eventually  dissensions  arose  among  them ;  they  were  divided  and 
overthrown,  and  their  community  was  broken  up. 

American  experiments.  America  has  been  a  fruitful  field  for 
the  trying  out  of  all  sorts  of  experiments.  Many  of  the  first 
colonists  came  here  because  they  were  inspired  by  religious  senti- 
ments.   They  founded  colonies  where  their  religious  ideas  could 


COMMUNISM  357 

flourish.  This  continent  presented  a  virgin  field  where  people  with 
peculiar  ideas  of  religious  organization  or  of  social  economy  could 
come  and  put  their  ideals  to  the  test. 

The  outline  on  the  following  page  gives  a  rough  classification  of 
the  more  important  of  these  experiments.  There  were  many  not 
included  in  this  list,  which  were  either  unimportant  as  to  numbers 
or  so  short-lived  as  to  m^ake  them  unworthy  of  mention.  It  will  be 
noticed  that  the  long-lived  communities  were  all  religious  in  their 
nature.  Of  the  nonreligious  communities  only  one,  namely,  the 
Icarians,  lasted  a  single  generation,  whereas  several  of  the  re- 
ligious communities  have  lasted  half  a  century,  and  one  group 
of  communities  (the  Shakers)  has  several  colonies  that  have  sur- 
vived for  more  than  a  century. 

Religious  communities.  T^lany  of  the  religious  communities, 
it  will  be  noticed,  are  of  foreign  origin,  and  most  of  these  are  of 
German  origin.  The  Shakers  are  placed  among  those  of  American 
origin.  As  a  religious  sect  the  Shakers  originated  in  England,  but 
they  made  their  experiments  in  communism  in  this  country.  They 
have  established  numerous  colonies  from  IMaine  to  Kentucky. 
They  are  celibates,  and  therefore  their  continuing  existence  de- 
pends upon  their  ability  to  make  converts.  This  they  have  failed 
to  do  in  recent  years,  and  consequently  the  Shaker  communities 
are  dying  out  as  the  old  people  drop  away. 

The  Perfectionists  originated  in  Vermont  under  the  leadership 
of  ^Ir.  John  Humphrey  Noyes.  They  afterwards  moved  to  Oneida, 
New  York.  They  have  given  up  communism  and  have  organized 
themselves  in  the  form  of  a  joint-stock  society  and  are  still  prosper- 
ous and  doing  a  thriving  business,  having  found  that  the  practical 
experience  of  the  real  world  is  a  better  guide  than  pure  idealism. 

A  multitude  of  other  experiments  of  a  more  or  less  religious 
nature  have  been  carried  out  by  faith  healers,  Adventists,  and 
other  people  of  rather  extreme  religious  views. 

Of  the  religious  communities  of  foreign  origin  that  at  Ephrata, 
Pennsylvania,  was  the  first  to  be  organized  on  a  durable  basis  in 
this  country.  Like  the  Shakers,  they  were  celibates  and  were 
therefore  doomed  to  extinction. 


358 


ELEMENTARY  ECONOMICS 


American 
Communistic- 
Societies  1 


The  Shakers  (numerous  colonies), 

Maine  to  Kentucky,  1787- 
The  Perfectionists  of  Oneida,  N.Y., 

1848-1879 
Zion  City,  111.,  1890-1896 
Jemima  Wilkinson'sNew  Jerusalem, 

N.Y.,  1786-1820 
Celesta,  Pa.,  1852-1864 
fOf  American  I  Salem-on-Erie,  N.Y.,  1867- 

origin  ]  The  Woman's  Commonwealth,  Tex. 

and  Washington  (D.  C),  1880- 
The  Lord's  Farm,  N.J.,  1877 
Shalam,  or   the    Children's    Land, 

N.  Mex.,  1884-1901 
Estero,  Fla.,  1904- 
The  Christian  Commonwealth,  Ga., 
'Religious^  1896- 

.The  House  of  David,  Mich.  (?) 
Ephrata,  Pa.,  1732- 
The  Harmonists,  Pa.,  1803- 
The    Separatists    of    Zoar,    Ohio, 

1819-1898 
The  Amana  Society,  Iowa,  1843- 
The  Bishop  Hill  Colony,  111.,  1846- 

1862 
The      Bruederhof      Communities, 

S.  Dak.,   1862- 
The   Waldensian    Colonies,   N.  C. 

and  Tex.,  1893- 
^St.  Nazianz  Colony,  Wis.,  1854 

{New  Harmony,  Ind.,  1825-1827 
Yellow  Springs,  Ohio,  1824 
'Brook  Farm,  Mass.,  1841-1847 
Fruitlands,  Mass.,  1843 
Hopedale,  Mass.,  1841-1858 
North    American    Phalanx,    N.J., 

1843-1856 
Wisconsin  Phalanx,  Wis.,  1 844- 1 850 
Northampton    Association,    Mass., 
Non-         J  1842-1846 

religious "1  [Numerous  others 

f  Nauvoo,  111.,  1849-1866 
Cheltenham,  Mo.,  1858-1864 
Icaria,  Iowa,  i860- 1895 
Skaneateles     Community,     N.  Y., 

1844-1846 
Polish    Colony,    Anaheim,    Calif., 

1876-1878 
The  Ruskin  Commonwealth,   Ga., 
L Independent^      1 896-1901 

The      Cooperative      Brotherhood, 

Wash.,  1898- 
Equality  Colonv,  W^ash.,  1897- 
The  Straight  Edgers,  N.Y.,  1899- 

^  Based  on  "  American  Communities,"  by  W.   A.  Hinds.   Chicago,   1908. 


Of  foreign 
origin 


Owenistic 


Fourieristic 


The  Icarians- 


COMMUNISM  359 

One  of  the  most  successful  of  all  these  experiments  was  started 
in  western  Pennsylvania  by  some  German  pietists  among  the  fol- 
lowers of  one  Georg  Rapp,  from  whom  they  were  given  the  name 
"Rappists."  They  afterwards  moved  to  Indiana,  where  they  so- 
journed for  a  time  at  New  Harmony  in  the  southwestern  corner 
of  the  state.  After  a  few  years  they  sold  out  and  moved  back  to 
Pennsylvania.  Their  colony,  known  as  Economy,  was  a  place  for 
sightseers  for  many  years. 

The  Separatists  of  Zoar  and  the  Amana  Society  were  somewhat 
similar  in  their  origin  and  in  their  subsequent  history.  They  did 
not  practice  celibacy.  They  prospered  amazingly  and  presented 
a  very  attractive  life  as  seen  by  visitors  from  the  outside.  They 
were  animated  by  intense  religious  enthusiasm  and  by  devotion  to 
their  own  leaders.  The  Separatists  of  Zoar,  however,  gave  up 
communism  in  1898,  largely  because  the  younger  generation  had 
lost  something  of  the  religious  zeal  of  the  older  generations  and 
decided  that  they  preferred  the  individualistic  type  of  life  to  the 
communistic.  The  Amana  Society  is  still  flourishing,  and  the 
people  are  apparently  satisfied. 

The  Bishop  Hill  Colony  in  Illinois  was  a  Swedish  colony ;  its 
character  and  organization  resembled  most  of  the  others.  When 
they  lost  their  intense  religious  zeal  they  likewise  lost  their  en- 
thusiasm for  the  communistic  type  of  life  and  gave  it  up. 

A  series  of  communistic  societies  is  still  flourishing  in  South 
Dakota.    They  are  known  as  the  Brotherhood  Societies. 

Several  communities  of  North  Italian  Protestants  have  flourished 
in  the  South,  particularly  in  Valdese,  North  Carolina,  and  near 
Gainesville,  Texas. 

Nonreligious  communities.  In  1822  Robert  Owen,  a  great 
English  philanthropist  and  a  firm  believer  in  what  was  then  called 
socialism,  came  to  America  for  the  purpose  of  establishing  an  ideal 
community.  He  delivered  many  addresses  and  created  much  en- 
thusiasm. In  looking  about  for  a  location  he  found  that  the  Har- 
monists, who  were  then  living  in  New  Harmony,  Indiana,  were 
desirous  of  selling  out  and  moving  back  to  Pennsylvania.  He 
bought  all  their  real  estate  and  proceeded  to  establish  a  colony  of 


36o  ELEMENTARY  ECONOMICS 

his  own.  He  was  a  man  of  great  ability,  who  had  made  a  fortune 
of  his  own,  which  he  devoted  liberally  to  the  propagation  of  his 
ideas.  His  colony,  however,  was  made  up  of  idealists  who  were 
more  in  the  habit  of  talking  about  their  theories  of  society  than  of 
working  to  produce  wealth ;  it  was  a  good  illustration  of  the  in- 
ability of  any  community  to  live  on  talk.  It  lasted  a  little  over 
two  years,  largely  at  the  expense  of  Mr.  Owen.  Numerous  other 
experiments  of  the  same  kind  were  tried,  none  of  which  lasted  for  a 
single  year.  One  at  Yellow  Springs,  Ohio,  lasted  for  several  months. 

About  1 84 1  the  works  of  a  French  communist,  Fourier,  were 
translated  and  published  in  this  country.  They  created  great  en- 
thusiasm, and  a  large  number  of  experiments  were  made.  The 
most  notable  of  these  was  Brook  Farm,  Massachusetts,  which  was 
started  independently  but  afterward  adopted  the  plan  of  Fourier. 
This  experiment  was  notable  mainly  because  of  the  great  names 
in  its  list  of  members.  Some  of  the  most  distinguished  men  and 
women  of  that  day,  in  letters  and  in  scholarship,  joined  the  Brook 
Farm  community.  The  most  successful  of  the  Fourier  experiments, 
however,  was  the  North  American  Phalanx  in  New  Jersey.  It 
lasted  for  thirteen  years.  An  experiment  at  Hopedale,  Massachu- 
setts, was  only  partially  communistic;  it  lasted  seventeen  years 
and  then  became  a  joint-stock  association. 

As  indicated  above,  the  most  successful  of  all  the  nonreligious 
communities  in  this  country  was  the  Icarian  community  in  Iowa. 
They  were  followers  of  Etienne  Cabet,  a  French  communist,  who 
wrote  a  very  attractive  book  entitled  "A  Voyage  in  Icaria."  It 
awoke  the  slumbering  idealism  of  many  French  people  who  desired 
to  form  a  commonwealth  after  the  description  of  the  life  of  the 
Icarians.  Cabet  led  his  followers  to  this  country  and  landed  in 
New  Orleans,  hoping  to  establish  them  in  northeastern  Texas. 
The  land  proved  inaccessible  and  the  climate  not  very  agreeable. 
They  returned  to  New  Orleans  discouraged,  but  learned  that 
the  Mormons  had  recently  been  driven  out  of  Nauvoo,  Illinois. 
They  proceeded  by  boat  to  Nauvoo  and  established  themselves, 
finding  plenty  of  vacant  houses  and  factory  buildings.  Here 
they  prospered  for  a  number  of  years,  but  they  wished  to  find  a 


COMMUNISM  361 

situation  where  they  could  be  more  to  themselves.  A  tract  of  land 
was  bought  in  southwestern  Iowa,  not  very  far  from  the  present 
town  of  Corning.  There  they  lived  under  the  communistic  system 
until  1895,  when  they  gave  up  communism  and  came  over  to  an 
individualistic  regime. 

A  large  number  of  other  societies  have  been  established  by  the 
followers  both  of  Robert  Owen  and  of  Fourier  and  in  recent  years 
by  the  admirers  of  Laurence  Gronlund  and  Edward  Bellamy. 

Results.  It  may  seem  as  though  the  experiences  of  these  nu- 
merous communistic  societies  tended  to  throw  discredit  upon  all 
communistic  ideals.  The  advocates  of  communism,  however,  insist 
that  the  principles  of  communism  are  still  sound,  even  though  a 
thousand  communities  fail.  To  an  impartial  observer  it  looks  as 
though  communism  might  work  very  well  if  people  were  built  on 
a  communistic  plan.  If  they  have  a  passion  for  communism  or  a 
powerful  religious  emotion  which  will  overcome  their  individual- 
istic and  particularistic  tendencies,  they  may  live  together  peaceably 
under  communism.  Unless  they  are  inspired  with  religious  zeal 
or  a  genuine  passion  for  communism,  it  seems  as  though  the 
natural  individuality,  not  to  say  the  contrariness,  of  human  nature 
would  continue  to  break  up  all  communistic  societies  in  the  future 
as  it  has  in  the  past. 

But  why,  it  may  be  asked,  will  not  communism  work  in  a  large 
national  group  as  it  now  works  in  a  small  family  group  ?  It  does 
not  seem  to  work  particularly  well  in  some  families.  In  those  few 
abnormal  cases  where  the  members  of  the  family  have  no  particular 
affection  for  one  another,  the  question  of  the  division  of  the  family 
funds  is  a  difficult  one.  If  the  father  is  selfish  and  cares  nothing 
for  the  others,  he  becomes  an  autocrat  and  spends  all  or  the 
greater  part  of  his  income  upon  himself.  If  the  others  feel  the 
same  way  toward  him  and  one  another,  they  quarrel  among  them- 
selves. But  in  a  normal  case,  where  an  intense  affection  for  one 
another  prevails,  there  is  no  quarreling  and  everything  is  shared 
in  common. 

If  it  were  possible  for  the  members  of  a  large  national  group 
to  feel  toward  one  another  as  the  members  of  a  normal  family 


362  ELEMENTARY  ECONOMICS 

feel,  communism  or  almost  any  other  system  might  work  well. 
But  the  average  man's  capacity  for  affection  is  limited.  It  would 
take  one  with  a  genius  for  friendship  to  feel  a  warm  affection  for 
even  a  hundred  separate  individuals,  to  say  nothing  of  a  hundred 
million.  It  would  be  practically  impossible  for  any  of  us  to  feel 
toward  each  other  and  every  one  of  a  hundred  million  people,  only 
a  few  of  whom  we  have  ever  seen,  precisely  as  we  do  toward  our 
own  brothers  and  sisters,  fathers  and  mothers,  and  other  very 
near  relatives.  This  is  sufficient  reason  why  communism  cannot 
be  made  to  work  well.  It  would  probably  work  very  much  as  a 
family  works  when  family  affection  has  disappeared. 

EXERCISES 

1.  How  should  you  classify  the  different  programs  of  reform? 

2.  What  is  communism  ?    How  is  it  related  to  anarchism  ? 

3.  What  is  meant  by  a  Utopia  ? 

4.  Have  there  been  any  experiments  in  communism? 

5.  Where  have  most  of  these  experiments  been  tried  ? 

6.  Have    religious    or   nonreligious    experiments   had   the   greater 
success  ? 

7.  Give  an  account  of  some  of  the  more  successful? 

8.  Why  have  they  generally  failed? 

9.  In  what  sense  is  a  family  communistic? 

10.  Does  the  family  succeed  where  there  is  no  family  affection  ? 

11.  Is  it  likely  that  any  other  form  of  communism  would  succeed 
without  a  strong  bond  of  affection? 


CHAPTER  XLIV 
SOCIALISM 

Socialism  and  communism  have  shifted  meanings.  The  term 
"socialism"  has  a  variety  of  meanings,  though  there  are  certain 
elements  common  to  every  definition.  During  the  last  seventy- 
five  years  the  meanings  attached  to  socialism  and  communism 
have  been  shifted.  That  which  is  now  known  as  socialism  was 
formerly  known  as  communism.  Karl  Marx,  who  is  regarded  as 
the  great  apostle  of  modern  socialism,  called  himself  a  communist. 
On  the  other  hand,  "socialism"  was  applied  to  general  schemes  for 
social  amelioration  which  did  not  involve  any  fundamental  change 
in  the  organization  of  society.  Communism,  however,  fell  into 
disrepute,  and  its  followers  discarded  the  name  and  began  calling 
themselves  socialists. 

There  is  a  tendency  on  the  part  of  followers  of  any  program  or 
movement  to  define  their  program  in  the  most  favorable  terms 
possible.  This  applies  to  socialists  as  well  as  to  other  propagan- 
dists. Sometimes  this  tendency  leads  to  a  definition  of  socialism 
which  does  not  define,  but  which  includes  the  opponents  as  well 
as  the  defenders  of  socialism.  When  it  is  said,  for  example,  that 
socialism  teaches  the  doctrine  that  only  he  who  produces  shall 
consume,  it  may  be  replied,  "  So  also  does  individualism "  and 
practically  every  other  "ism"  that  has  anything  to  do  with  the 
production  and  distribution  of  wealth ;  when  it  is  said  that 
socialism  teaches  the  doctrine  of  equality  of  opportunity,  it  may 
be  replied,  "So  also  does  individualism"  and  all  the  other  "isms." 

The  difference  between  a  socialist  and  a  nonsocialist.  In 
order  to  define  socialism  we  must  find  something  which  will  com- 
pletely distinguish  the  socialist  from  the  nonsocialist.  The  only 
definition  that  will  do  this  is  the  following:  A  socialist  is  one  who 
believes  that  the  community,  the  public,  or  the  government  should 

363 


364  ELEMENTARY  ECONOMICS 

own  and  operate  the  means  of  production,  leaving  to  individuals 
the  ownership  of  most  articles  of  consumption.  By  the  means  of 
production  are  meant  practically  all  that  is  included  under  the 
names  "land"  and  "capital"  (farms,  factories,  railroads,  mercan- 
tile houses,  and  office  buildings  would  all  be  included) ;  under  the 
program  of  socialism  all  these  things  would  be  owned  and  operated 
by  the  community,  the  public,  or  the  government.  This  would 
mean  that  every  individual  would  be  in  the  employ  of  the  govern- 
ment in  one  way  or  another.  Since  there  would  be  no  private 
enterprise,  no  one  could  start  a  farm,  a  factory,  a  store,  or  any 
business  enterprise  of  his  own.  Since  no  one  could  start  any  such 
enterprise,  no  one  could  be  employed  by  a  private  employer.  Since 
no  one  could  be  either  in  his  own  employ  or  in  the  employ  of  any 
private  organization,  everyone  would  have  to  be  in  the  employ  of 
the  government. 

Distinction  between  socialism  and  populism.  There  is  some 
difference  of  opinion  among  socialists  as  to  how  far  this  principle 
of  government  ownership  and  operation  should  extend.  Some  are 
willing  to  stop  with  trusts  and  monopolies.  This,  however,  is 
populism  rather  than  socialism.  It  is  based  not  on  a  theory  of 
capital  but  on  a  theory  of  monopoly.  ^lany  people  who  favor  the 
private  ownership  of  capital  are  opposed  to  monopoly  and  believe 
that  the  best  way  to  curb  monopoly  is  to  turn  all  monopolistic 
enterprises  over  to  the  state.  Such  a  person  might  reject  utterly  all 
socialistic  theories  respecting  capital.  Moreover,  every  thorough- 
going socialist  really  bases  his  conclusions  on  his  theory  of  capital. 
The  work  of  Karl  Marx,  "Capital,"  has  been  called  the  Bible 
of  the  modern  socialist.  This  book  pays  very  little  attention  to 
the  question  of  monopoly ;  it  consists  almost  entirely  of  an  attack 
upon  private  capital  and  production  under  private  enterprise. 
From  Marx's  point  of  view  it  is  not  monopolized  capital,  but 
capital  as  such,  that  gives  its  owner  the  power  to  exploit  and  de- 
fraud other  people.  The  capital  belonging  to  a  farmer  as  well  as 
that  belonging  to  a  great  trust,  to  a  small  manufacturer  as  well  as 
to  a  large  manufacturer,  to  the  driver  of  a  jitney  bus  as  well  as  to 
a  street-car  company,  is  to  be  owned  and  operated  by  the  public. 


SOCIALISM  365 

On  the  other  hand,  the  slogan  "Let  the  nation  own  the  trusts" 
has  nothing  to  do  with  capital  as  such.  Such  a  program  is  based 
entirely  on  a  theory  of  monopoly,  which  is  the  essence  of  populism 
rather  than  of  socialism.  Those  who  attack  monopoly  may  quite 
consistently  hold  to  the  idea  that  capital  which  is  not  monopolized 
is  a  help  rather  than  a  hindrance  to  labor,  that  he  who  accumulates 
capital  by  consuming  less  than  his  income  is  benefiting  rather  than 
injuring  labor,  and  that  therefore  everybody  ought  to  be  encour- 
aged to  accumulate  capital  and  invest  it  in  productive  enterprises. 
From  this  point  of  view  the  individual  who  has  accumulated 
capital  and  invested  it  in  a  productive  enterprise  has  not  only 
increased  the  productivity  of  the  community  but  is  entitled  to 
some  reward  for  that  service  which  he  has  performed.  This 
reward  would  be  called  interest.  The  populist,  therefore,  would 
approve  of  the  receipt  of  interest  on  the  part  of  the  owner  of 
unmonopolized  capital. 

Socialism  opposed  to  private  capital.  All  the  great  authorita- 
tive books  on  socialism  are  fundamentally  opposed  to  interest  or 
to  anyone's  receiving  any  income  from  the  ownership  of  capital,  or 
any  advantage  from  his  own  accumulations.  If  labor  is  the  only 
producer  of  wealth,  the  saver  and  accumulator  is  not  a  producer 
and  is  therefore  not  entitled  to  any  share  in  the  product.  Since 
interest  is  the  share  which  goes  to  the  accumulator  and  investor, 
it  cannot  be  justified  under  the  socialistic  philosophy. 

Difference  between  a  socialist  and  a  liberalist.  The  defini- 
tion of  a  socialist  as  one  who  believes  in  the  common,  public,  or 
government  ownership  of  all  the  means  of  production  separates 
the  socialist  not  only  from  the  populist  and  the  communist  but 
from  the  liberalist  as  well.  Moreover,  this  is  the  only  definition 
which  will  at  all  distinguish  the  socialist  from  the  liberalist.  The 
liberalist  is  quite  as  desirous  of  economic  justice  and  of  equality  of 
opportunity  as  the  socialist  is,  but  he  believes  that  the  liberal  pro- 
gram is  better  adapted  to  the  securing  of  those  ends  than  the 
socialist  program.  The  liberal  program  permits  the  private  owner- 
ship of  capital,  and  it  also  permits  the  receipt  of  interest  as  a  pri- 
vate reward,  on  the  ground  that  the  accumulation  of  capital  is  a 


366  ELEMENTARY  ECONOMICS 

productive  service, — not  that  it  is  philanthropic,  but  that  it  is 
useful  to  society  and  worthy  of  a  reward. 

In  order  to  becloud  the  issue  it  is  sometimes  stated  that  the 
socialist  believes  that  men  should  be  paid  for  doing  things,  and 
the  liberalist  that  men  should  be  paid  for  owning  things.  The 
liberalist  does  not  believe  that  men  should  be  paid  for  owning 
things  unless  the  ownership  is  a  symptom  of  their  having  done 
something  which  was  useful.  If  two  men,  A  and  B,  have  been 
doing  equally  good  work  with  their  hands  and  their  heads  and 
have  earned  equal  incomes,  they  should  be  paid  the  same  accord- 
ing to  the  liberalist  as  well  as  the  socialist.  If,  however,  A  con- 
sumes all  his  income,  but  B  invests  a  part  of  his  in  the  tools  of 
production,  the  liberalist  believes  that  B  has  done  better  than  A. 
If  ever>'body  did  as  A  does,  the  nation's  stock  of  tools  would  never 
increase ;  if  everybody  did  as  B  does,  the  nation's  stock  of  tools 
would  increase  rapidly.  The  more  citizens  it  has  of  the  B  type 
the  more  prosperous  will  the  nation  become ;  the  more  it  has  of  the 
A  type  the  less  prosperous  will  it  become.  It  is  very  important 
that  men  should  be  encouraged  to  join  the  ranks  of  the  B's  rather 
than  of  the  A's.  The  liberalist  therefore  holds  that  there  should 
be  some  inducement  to  men  to  do  what  B  has  done ;  namely,  to 
invest  a  part  of  their  income  rather  than  to  consume  it  all. 

There  is  no  other  definition  of  socialist  or  socialism  which  will 
separate  the  socialist  from  the  nonsocialist  or  which  will  particu- 
larly separate  him  from  the  liberalist.  The  term  "liberalist"  is 
justified  because  the  liberalist  believes  that,  so  far  as  possible, 
each  individual  should  be  at  liberty  to  start  his  own  enterprise  if 
he  is  so  disposed,  or  to  work  for  someone  else  if  he  prefers, — 
that  he  should  be  at  liberty  to  work  for  private  individuals  or  to 
work  for  the  government,  according  as  he  can  make  the  most  satis- 
factory voluntary  agreements.  In  short,  the  liberalist  is  willing  to 
trust  men  with  the  power  of  free  contract,  whereas  the  socialist 
relies  mainly  on  the  government's  power  of  compulsion. 

Socialism  involves  more  use  of  the  government's  power  of 
compulsion  than  liberalism  does.  It  has  been  said  that  the 
power  to  tax  is  the  only  capital  the  government  needs.    The  power 


SOCIALISM  367 

to  tax  is  compulsion.  In  order  to  carry  out  a  socialist  program  the 
public  would  have  to  use  its  power  of  compulsion  in  many  ways. 
It  would  have  to  prohibit  competition  by  private  individuals 
against  the  state,  as  it  now  forbids  private  individuals  to  compete 
with  the  post  office  in  the  carrying  of  first-class  mail.  It  would 
have  to  use  its  taxing  power  to  compel  the  payment  of  deficits 
whenever  deficits  occurred. 

The  liberalist,  on  the  other  hand,  proposes  to  reduce  to  a  mini- 
mum the  compulsion  of  the  government  over  the  individual.  An 
industry  which  cannot  be  carried  on  without  any  compulsion 
whatsoever  had  probably  better  be  left  to  die,  unless  it  be  one 
which  is  necessary  for  military  protection. 

If,  for  example,  an  individual  who  desires  to  manufacture  shoes 
cannot  manufacture  them  successfully  without  the  power  of  com- 
pulsion, he  should  not  manufacture  them  at  all.  If  he  can  buy 
his  raw  materials  on  the  open  market,  hire  his  labor  on  the 
open  market,  and  sell  his  product  on  the  open  market,  making  use 
of  voluntary  exchange  and  voluntary  agreement  in  every  case,  and 
can  manage  to  make  a  profit  out  of  his  business,  he  is  entitled  to 
remain  in  business.  It  shows  that  he  is  efficient  enough  to  as- 
semble the  various  factors  of  production  in  such  a  way  as  to  pro- 
duce an  article  which  is  worth  more  than  the  cost  of  the  factors  of 
production.  This  is  highly  economical.  If,  in  order  to  make  a 
living,  he  had  to  be  paid  out  of  the  public  treasury,  and  the 
public  had  to  make  use  of  its  power  of  taxation  in  order  to  get 
the  wherewithal  to  pay  his  salary,  there  is  a  strong  probability 
that  the  product  would  not  be  worth  as  much  as  the  factors  which 
entered  into  it.  In  that  case  the  power  to  tax  would  have  to  be 
made  use  of  to  keep  the  business  going ;  but  the  fact  that  com- 
pulsion was  necessary  would  be  proof  that  it  ought  not  to  be  used, 
but  that  the  business  should  die  a  natural  death. 

Where  there  is  no  free  bargain  and  sale, — where  consumers  are 
not  at  liberty  to  turn  from  one  producer  to  another  and  buy  what- 
ever suits  them  best,  where  the  producers  of  raw  material  are  not 
at  liberty  to  sell  to  any  manufacturer  who  will  pay  them  the 
highest  price,  and  where  labor  likewise  is  not  free  to  bargain  to 


368  ELEMENTARY  ECONOMICS 

its  own  advantage, —  there  is  no  assurance  that  the  maximum 
economy  will  be  secured. 

Compulsion  sometimes  necessary.  It  is  not  to  be  inferred, 
however,  that  the  liberalist  is  an  anarchist  and  therefore  opposed 
to  all  exercise  of  compulsion  or  governmental  power.  He  is  one 
who  believes  that  a  great  many  lines  of  production  can  be  safely 
and  successfully  carried  on  without  the  use  of  compulsion,  under 
voluntary  agreements,  free  contract  and  sale,  and  individual  initia- 
tive. He  also  quite  frankly  recognizes  that  there  are  many  things 
which  cannot  be  done  in  this  way. 

For  example,  the  forestation  of  certain  mountain  slopes  would 
be  undertaken  by  private  enterprise  only  when  the  enterprisers 
thought  that  it  would  be  profitable  to  them.  But,  although  it 
might  be  unprofitable  when  considered  by  itself,  it  might  still  be 
highly  profitable  when  considered  from  the  viewpoint  of  the  nation 
as  a  whole.  If  the  deforestation  of  high  mountain  slopes  results 
in  the  overflow  of  streams  and  the  destruction  of  valuable  land 
along  the  lower  watercourses,  this  is  a  matter  which  affects  the 
country  as  a  whole  but  might  not  interest  the  individual  owners  of 
the  high  slopes.  If  they  found  it  profitable  to  cut  off  the  timber  and 
sell  it,  they  would  do  so  even  though  property  of  much  greater  value 
a  few  hundred  miles  away  on  the  river  bottoms  were  destroyed. 

Here  would  be  a  clear  case  where  government  enterprise  would 
be  superior  to  private  enterprise.  But  similar  reasoning  would  in 
some  cases  prove  the  superiority  of  international  enterprise  over 
government  enterprise.  It  often  happens  that  the  high  mountain 
slopes  are  within  the  territory  of  one  nation  and  the  river  bottoms 
in  the  territory  of  another.  In  that  case  the  nation  owning  the 
high  mountain  slopes  would  have  no  interest  in  protecting  the  river 
bottoms.  Nothing  but  an  international  arrangement  could  solve 
that  problem. 

Again,  take  such  an  enterprise  as  the  building  of  lighthouses. 
The  private  individual  who  built  a  lighthouse  on  a  rocky  coast 
would  scarcely  be  able  to  collect  toll  or  to  get  payment  for  the 
utility  which  he  was  furnishing.  Not  having  the  power  of  com- 
pulsion, he  could  not  force  mariners  to  pay,  nor  could  he  tax  the 


SOCIALISM  369 

public  at  large  in  order  to  build  and  maintain  lighthouses.  The 
government  alone  has  this  power  of  compulsory  collection.  In  any 
other  case  (and  there  are  many  of  them)  where  it  can  be  shown 
that  freedom  of  contract  will  not  succeed  in  getting  an  important 
work  done  or  an  important  utility  produced,  the  liberalist  is  willing 
to  see  compulsion  used. 

"Socialism,"  like  "vegetarianism,"  an  exclusive  term.  ''Lib- 
eralism" is  therefore  not  an  exclusive  term,  as  "socialism"  seems 
to  be.  One  is  not  a  vegetarian  by  virtue  of  the  fact  that  one 
sometimes  eats  vegetable  food ;  one  is  a  vegetarian  only  when 
one  refuses  to  eat  anything  else.  A  liberalist  with  respect  to  food 
is  willing  to  eat  any  kind  which  seems  to  him  desirable.  In  a 
similar  sense,  one  is  not  a  socialist  by  virtue  of  the  fact  that  one 
is  willing  that  the  government  should  do  some  things ;  one  is  a 
socialist  only  when  one  believes  that  the  government  should  do 
ever>'thing  or  that  private  individuals  should  not  carry  on  any 
productive  industry  or  own  any  productive  property.  The  liber- 
alist is  willing  that  industry  shall  be  carried  on  in  any  way 
that  seems  to  promise  desirable  results.  If  an  individual  farmer 
can  grow  corn  successfully,  the  liberalist  is  willing  that  he  shall 
do  so  and  likewise  make  a  profit ;  and  so  on.  He  perhaps 
goes  a  step  farther  and  believes  that  preference  should  be  given  to 
free  and  voluntary  business  arrangements  rather  than  to  compul- 
sion, and  that  compulsion  should  be  used  only  when  the  voluntary 
system  fails  to  get  desirable  things  done. 

Criticism  always  easy.  As  to  the  merits  of  the  socialistic  pro- 
gram as  compared  with  other  programs,  there  will  always  be  con- 
siderable differences  of  opinion.  It  is  not  difficult  to  point  out 
with  a  great  deal  of  particularity  the  evils  that  result  from  a  liberal 
policy.  The  unfortunate  condition  of  those  people  who  are  not 
in  a  position  to  bargain  to  their  own  advantage  is  perhaps  the 
strongest  argument  used  by  the  present-day  socialists. 

Unfortunately  it  is  easy  to  find  many  communities  in  which 
certain  classes  of  laboring  men  find  it  impossible  to  get  good 
wages  by  the  method  of  voluntary  agreement,  whereas  other  people 
who  use  this  method  get  larger  incomes  than  are  necessary  or 


370  ELEMENTARY  ECONOMICS 

desirable.  This  condition,  however,  is  not  confined  to  labor. 
Anyone  who  is  trying  to  sell  anything  with  which  the  market  is 
oversupplied  is  in  a  more  or  less  helpless  position.  WTien  more  is 
offered  for  sale  than  buyers  care  to  buy,  the  seller  is  very  depend- 
ent, whereas  the  buyer  is  independent.  Under  the  system  of  volun- 
tary agreement  the  seller  must  take  what  he  can  persuade  the 
buyer  to  pay,  and  the  buyer  can  take  his  choice.  If,  however, 
the  conditions  are  reversed  and  buyers  want  to  buy  more  than 
sellers  are  willing  to  sell,  then  buyers  are  very  dependent;  they 
must  take  whatever  they  can  persuade  the  sellers  to  sell,  whereas 
sellers  are  independent  and  can  take  their  choice. 

It  happens  that  certain  kinds  of  labor  seem  almost  chronically 
to  be  in  this  position  of  dependence.  They  always,  and  rightly, 
evoke  sympathy.  There  are  two  ways,  however,  of  correcting  the 
difficulty.  One  is  to  substitute  the  system  of  compulsion  for  the 
system  of  voluntary  agreement ;  the  other  is  to  make  that  kind  of 
labor  scarce  and  hard  to  find  and  to  increase  the  demand  for  it. 

Seeing  that  these  unskilled  laborers  are  so  frequently  at  a  dis- 
advantage under  the  system  of  voluntary  agreement,  it  looks 
rather  obvious  to  some  people  that  something  else  must  be  substi- 
tuted. But  the  liberalists  maintain  that  labor  is  not  necessarily, 
and  not  always,  at  a  disadvantage  under  the  system  of  voluntary 
agreement.  If  you  can  distribute  the  labor  supply  so  that  there 
will  not  be  too  much  of  one  kind  in  proportion  to  the  other  factors, 
then  the  laborers  will  be  in  a  position  of  great  independence. 

It  is  not  difficult  to  point  out  instances  where  the  laborer  is  in- 
dependent and  the  capitalist  dependent, — where  the  preservation 
of  the  capitalist's  property,  where  even  his  income  itself,  depends 
on  getting  labor  when  there  is  not  enough  labor  to  go  around.  In 
such  cases  the  laborer  can  take  his  choice  of  employers.  There 
need  not  be  the  slightest  difficulty  in  creating  such  conditions  for 
labor  in  general,  but  it  will  require  the  following  of  a  program 
radically  different  from  that  of  the  socialist.  It  looks  much  easier 
merely  to  exercise  the  compulsory  power  of  the  state  and  cure  the 
difficulty  at  one  stroke.  Not  many  difficulties,  however,  are  perma- 
nently cured  at  one  stroke  or  by  the  exercise  of  compulsion. 


SOCIALISM  371 

Why  there  are  socialists.  "WTien  the  victim  of  a  wasting  sick- 
ness goes  to  a  physician  for  help,  he  is  very  likely  to  be  disap- 
pointed. The  physician,  if  he  is  scientific  and  therefore  honest, 
can  seldom  promise  him  a  definite  cure.  Being  a  scientific  man, 
he  can  point  out  the  causes  which  produce  the  illness  and  say  that, 
if  at  some  time  in  the  past  the  patient  had  pursued  different  habits, 
he  would  not  have  become  ill.  This,  however,  is  cold  comfort  to 
the  sick  man  who  is  suffering  intense  pain.  Or  the  physician  may 
prescribe  a  course  of  treatment  which,  if  rigidly  followed  for  a 
period  of  time,  will  tend  to  remove  the  causes  of  the  illness  and 
eventually  improve  the  patient's  condition.  This  likewise  is  cold 
comfort  to  the  man  in  pain,  who  wants  immediate  relief.  Such 
a  man  is  in  a  good  frame  of  mind  to  lend  a  favorable  ear  to  the 
"doctor"  with  a  specific  remedy  who  promises  him  a  specific  cure. 

Similarly,  the  man  who  is  in  the  grip  of  poverty,  as  well  as  his 
sympathizers,  is  likely  to  be  disappointed  with  the  program  of  the 
economist.  The  economist,  if  he  is  a  scientific  man  and  therefore 
honest,  will  be  compelled  to  say  that  there  is  no  immediate  relief 
which  is  not  likely  to  produce  worse  results  in  the  future.  Being 
a  scientific  man,  he  can  point  out  the  conditions  which  tend  to 
produce  poverty  and  can  prescribe  policies  which,  if  they  had  been 
pursued  consistently  for  a  number  of  years,  would  have  prevented 
the  poverty  which  now  exists.  This  is  cold  comfort  to  the  man 
who  is  already  suffering  from  poverty  and  longing  for  relief.  Such 
a  man  is  in  a  condition  to  lend  a  favorable  ear  to  the  doctor  with 
a  specific  remedy.  The  obvious  and  specific  remedy  which  is 
commonly  urged  by  socialists  is  the  compulsory  power  of  the  state 
or  of  the  mass  over  the  individual. 

EXERCISES 

1.  Why  have  "socialism"  and  "communism"  shifted  meanings? 

2.  What  is  the  present  meaning  of  the  word  "socialism"? 

3.  How  should  you  distinguish  between  a  socialist  and  a  nonsocialist  ? 

4.  What  is  the  distinction  between  socialism  and  populism? 

5.  What  is  the  difference  between  a  socialist  and  a  liberalist? 


CHAPTER  XLV 
THE  SINGLE  TAX 

Meaning  of  the  single  tax.  By  the  single  tax  is  meant  a  policy 
under  which  all  the  public  revenue  is  to  be  raised  by  a  single  tax 
on  land  value.  One  of  the  most  persistent  misinterpretations  of 
the  single  tax  is  to  assume  that  it  means  a  tax  to  be  raised  on  real 
estate  rather  than  on  land  values.  Land  value  is  defined  as  the 
value  of  the  land  itself  irrespective  of  all  improvements,  such  as 
ditching,  draining,  fencing,  the  planting  of  trees,  and  the  erection 
of  buildings.  In  short,  everything  done  on  the  land  itself  to  im- 
prove the  value  of  an  estate  is  classed  as  an  improvement  and, 
under  the  single  tax,  would  be  exempt  from  taxation.  This  leaves 
nothing  except  the  location  value  and  the  fertility  to  be  taxed. 

The  physiocrats,  believers  in  the  "rule  of  nature,"  believed 
in  the  impot  unique.  The  original  advocates  of  the  single  tax  were 
a  group  of  French  economists  called  physiocrats.  It  was  their 
belief  that  land  was  the  original  and  fundamental  source  of  all 
wealth,  and  that  the  rent  of  land  was  the  only  real  surplus  wealth 
which  the  community  ever  produced.  From  their  point  of  view, 
rent  was  due  to  the  bounty  of  nature.  They  believed  that  every 
other  tax  must  eventually  be  paid  out  of  rent  anyway,  wherever 
it  may  have  been  laid  by  the  government.  If  you  tax  the  prod- 
ucts of  industry,  they  said,  there  is  no  surplus  out  of  which  the 
tax  can  be  paid ;  as  a  result  you  either  raise  the  price  of  the  prod- 
ucts or  depress  the  price  of  the  raw  materials.  If  you  tax  labor, 
you  must  raise  wages  accordingly ;  if  you  tax  enterprise,  you  must 
raise  profits.  Every  tax,  therefore,  is  shifted  from  one  to  another 
till  it  reaches  the  landowner,  who  alone  has  a  surplus  out  of  which 
it  can  be  paid.  The  landowner  cannot  shift  it  any  farther,  and, 
since  he  must  ultimately  pay  the  tax,  they  argued  that  it  was 
better  for  him  to  pay  it  directly  in  the  first  place  than  indirectly 

372 


THE  SINGLE  TAX  373 

after  several  shiftings  from  one  person  to  another.  They  regarded 
the  single  tax  as  a  good  system  of  taxation  for  raising  revenue,  not 
as  an  engine  of  social  reform. 

The  classical  economist  regarded  rent  as  a  peculiar  income. 
The  idea  that  landowners  who  live  entirely  upon  the  rent  of  land 
are  in  a  peculiar  sense  nonproducers  is  by  no  means  new.  Adam 
Smith ^  wrote,  in  1776,  "As  soon  as  the  land  of  any  country  has 
all  become  private  property,  the  landlords,  like  all  other  men,  love 
to  reap  where  they  never  sowed,  and  demand  a  rent  even  for  its 
natural  produce."  And  again,  "They  [the  landlords]  are  the 
only  one  of  the  three  orders  whose  revenue  costs  them  neither  labor 
nor  care,  but  comes  to  them,  as  it  were,  of  its  own  accord,  and 
independent  of  any  plan  or  project  of  their  own."^  Economists 
from  Adam  Smith  down  have  generally  agreed  on  this  point, 
though  they  have  not  generally  agreed  that  this  is  the  great  cause 
of  poverty  nor  that  the  abolition  of  ground  rent  would  be  a  social 
panacea. 

Ricardo,  in  developing  his  theory  of  rent,  laid  emphasis  upon 
the  fact  that  rent  arises  from  the  niggardliness  rather  than  from 
the  bounty  of  nature,  thus  taking  a  position  opposed  to  that 
of  the  French  physiocrats.  This  niggardliness  shows  itself  in  two 
ways :  first,  the  best  land  is  always  limited  in  area ;  second,  its 
productivity  is  limited.  On  any  given  area  the  amount  of  any 
crop  which  can  be  produced  is  limited ;  and  even  before  that  limit 
is  reached,  diminishing  returns  are  received  from  successive  applica- 
tions of  labor  and  capital.  Because  of  these  limitations  upon  the 
productivity  of  the  best  land,  poorer  and  poorer  land  must  be 
taken  into  cultivation  as  the  demand  for  products  increases.  The 
fortunate  possessors  of  the  better  grades  of  land  are  then  in  a 
position  to  demand  a  rent  for  their  land. 

The  single  tax  made  an  engine  of  social  reform  by  Henry 
George.  It  was  the  late  Henry  George,  in  his  book  entitled  "  Prog- 
ress and  Poverty,"  who  seized  upon  these  ideas  to  make  the  single 
tax  an  engine  of  social  reform.    He  began  his  inquiry  by  pointing 

^  Wealth  of  Nations,  Bk.  I,  chap.  vi. 
2  Ibid.  Bk.  I,  chap.  xi. 


374  ELEMENTARY  ECONOMICS 

out  that  even  in  the  midst  of  plenty,  poverty  still  persisted.  He 
stated  that  though  the  productive  power  of  the  world  had  increased 
many  fold  through  mechanical  improvements,  nevertheless  large 
numbers  of  people  remained  in  poverty.  In  fact,  he  went  so  far 
as  to  insist  that  increasing  numbers  were  compelled  to  live  in 
conditions  of  increasing  squalor. 

The  persistence  of  poverty  the  great  reproach  upon  civiliza- 
tion. This  phenomenon  of  the  persistence  of  poverty  in  spite  of 
the  world's  increase  in  productive  power  has  been  an  enigma  ever 
since  the  rise  of  mechanical  industries.  Various  answers  to  the 
puzzle  have  been  given.  Karl  Marx  and  his  followers  attributed  it 
to  the  fact  that  the  owners  of  capital  absorb  all  the  benefits  of 
the  increase  in  productive  power,  leaving  the  nonowners  of  capital 
no  advantage  whatsoever. 

It  is  very  easy  to  say — in  fact,  it  looks  like  mere  arithmetic  to 
say — that  with  the  same  rate  of  productiveness,  if  certain  classes 
who  are  now  receiving  large  incomes  should  not  receive  them,  there 
would  be  more  left  for  other  people.  If  the  incomes  of  capitalists 
and  landowners  were  cut  off,  more  would  be  left  for  the  laborers, 
provided  the  total  production  remained  the  same.  It  would  be 
equally  true  from  an  arithmetical  standpoint  to  say  that  if  the 
skilled  laborers  and  the  high-salaried  people  did  not  receive  so 
much,  more  would  be  left  for  the  rest,  if  the  rate  of  production 
remained  the  same.  In  other  words,  if  you  assume  a  given  rate  of 
production  and  then  assume  that  the  incomes  of  certain  classes  are 
cut  off,  you  can  demonstrate  that  this  would  leave  more  goods  for 
the  other  classes.  This,  however,  is  not  a  convincing  argument. 
If  anyone  performs  an  important  function  in  society,  and  thereby 
makes  society  richer,  it  cannot  be  said  that  by  cutting  off  this 
person's  reward  for  performing  his  function,  society  will  be  im- 
proved. By  the  cutting  off  of  his  reward  there  is  the  danger  of 
killing  the  goose  that  laid  the  golden  eggs ;  by  so  doing  you  may 
reduce  his  motive  for  labor  and  cause  him  to  perform  a  less  im- 
portant function  than  he  would  if  he  were  adequately  rewarded 
for  his  effort.  The  real  question  is,  therefore,  whether  the  capitalist 
performs  a  function  in  society  commensurate  with  the  reward 


THE  SINGLE  TAX  375 

which  he  receives.  If  the  answer  is  in  the  affirmative  the  cutting 
off  of  his  income  would  hardly  be  a  help  to  society.  The  same 
reasoning  applies  to  the  landowner :  if  he  performs  a  function  com- 
mensurate with  the  reward  which  he  receives,  it  would  obviously 
not  help  matters  to  cut  off  his  income.  So  here  again  the  real 
question  is  whether  or  not  the  landowner  performs  a  function 
commensurate  with  the  reward  which  he  receives. 

Distinction  between  location  value  and  fertility  value.  In  the 
chapter  on  Land  we  saw  that  the  two  economic  factors  in  land 
value  were  location  and  fertility.  In  so  far  as  the  value  of  land  is 
based  primarily  on  its  fertility,  that  value  may  be  easily  destroyed 
and  with  difficulty  replaced  ;  and,  in  fact,  the  land  of  little  fertility 
may,  by  careful  and  scientific  farming,  be  greatly  increased  in 
fertility.  This  increase  would  be  classed  as  improvement,  and  the 
increase  in  value  would  be  similar  to  the  increase  which  results 
from  ditching,  draining,  irrigating,  fencing,  clearing,  and  other 
forms  of  improvement.  Even  where  the  land  possessed  original 
fertility — that  is,  where  it  is  known  as  virgin  soil — it  may  easily 
deteriorate  under  bad  management  or  improve  under  good  man- 
agement. It  is  as  much  in  the  interest  of  society  that  good 
land  be  kept  from  deteriorating  as  that  poor  land  be  improved  in 
fertility.  If  the  owner  of  land  is  allowed  the  advantages  of  any 
improvements  in  fertility  which  result  from  his  management,  no 
one  could,  of  course,  consistently  object  to  it.  Again,  if  he  is  made 
to  suffer  some  penalty  for  allowing  the  land  to  deteriorate  in 
fertility  by  his  bad  management,  it  would  seem  equally  just. 

Putting  these  two  propositions  together,  it  seems  as  though  the 
owner  of  the  land,  whether  it  be  good  or  poor  land,  should  be  re- 
warded for  any  improvement  resulting  from  his  good  management 
and  penalized  for  any  deterioration  resulting  from  his  bad  manage- 
ment. If  the  single  tax  were  applied  rigidly,  and  the  value  not 
only  of  the  location  but  of  the  soil  itself  were  taxed  away,  the 
owner  would  get  neither  reward  nor  penalty.  That  is  to  say,  if 
he  were  taxed  for  the  full  value  of  his  land  while  the  soil  possessed 
its  original  fertility,  he  could  easily  "mine"  the  soil,  as  it  is 
called ;  that  is,  he  could  rapidly  exhaust  the  fertility  and  pocket 


376  ELEMENTARY  ECONOMICS 

the  temporary  advantage  from  it.  Then,  after  the  land  became 
less  valuable,  the  tax  would  have  to  come  down,  or  the  owner 
could  abandon  the  land  or  turn  it  over  to  the  state  whenever  it 
became  so  poor  as  not  to  be  worth  the  tax. 

But  if  he  is  allowed  the  full  value  of  the  fertility  of  his  soil, 
he  has  a  much  stronger  motive  for  preserving  or  increasing  its 
fertility.  In  the  pursuit  of  this  advantage,  or  in  the  warding  off 
of  the  disadvantage  of  deterioration,  he  performs  an  important 
public  function, — that  of  conserving  the  fertility  of  the  soil.  His 
reward  will  bear  some  ratio  to  the  value  of  the  service  which  he 
performs.  To  cut  off  his  reward  would  not  be  to  the  advantage 
of  the  public,  because  the  result  would  be  that  he  would  allow  the 
soil  to  deteriorate,  and  this  would  result  in  a  smaller  production. 
The  rest  of  society,  as  well  as  the  landowner,  would  suffer  from 
this  policy.  The  single  tax  would  put  the  owner  in  the  position 
of  a  tenant  who  had  to  pay  the  state,  in  the  form  of  a  tax,  all  that 
the  land  would  rent  for.  Tenants  are  notoriously  careless  in  the 
matter  of  conserving  soil  fertility. 

In  respect  to  location  value,  this  argument  scarcely  applies.  In 
some  cases,  it  is  true,  the  enterprise  of  the  landowner  has  created 
location  value.  This  occurs  when  he  himself  builds  a  road  instead 
of  asking  the  public  to  do  it,  or  when  he  beautifies  a  spot  and 
makes  it  attractive  as  a  place  for  dwellers,  or  when  he  builds  a 
trolley  line  or  any  other  means  of  access  to  his  land.  He  may  then 
be  said  to  have  created  the  location  value  of  his  land.  In  such 
cases  all  that  we  have  said  regarding  fertility  value  will  apply 
also  to  location  value. 

In  most  cases,  however,  the  location  value  is  not  the  creation  of 
the  individual  owner  but  of  the  general  public,  since  it  is  the  gen- 
eral public,  rather  than  the  individual  owner,  that  builds  schools, 
libraries,  and  streets,  maintains  police  systems,  and  brings  various 
utilities  within  reach.  A  few  notorious  cases  have  been  cited  of 
men  who  have  bought  land  favorably  situated  and  have  done  noth- 
ing to  improve  it,  having  even  resisted  taxation  and  all  improve- 
ments. Yet  in  spite  of  such  inertia  they  have  found  themselves 
rich  as  the  result  of  the  rise  in  the  location  value  of  the  land. 


THE  SINGLE  TAX  377 

A  few  such  conspicuous  cases  furnish  effective  arguments  in  favor 
of  the  single  tax — at  least  they  excite  resentment. 

A  land  tax  not  necessarily  a  single  tax.  The  arguments  for 
a  single  tax  are  not  the  same  as  for  a  mere  increase  of  the  land 
tax.  One  may  favor  the  increase  of  taxation  upon  the  location 
value  of  land  without  being  in  any  sense  of  the  word  a  single 
taxer.  He  may  believe  in  many  different  taxes,  such  as  the 
inheritance  tax,  licenses,  the  income  tax,  etc.  It  would  be  absurd 
to  call  such  a  man  a  single  taxer,  even  though  he  favored  a 
special  tax  on  the  location  value  of  land.  Again,  even  though 
one  were  in  the  strict  sense  of  the  word  a  single  taxer,  one  might 
advocate  it  on  purely  financial  grounds,  rather  than  on  the 
grounds  of  social  reform ;  that  is,  one  might  believe  that  all 
public  revenues  should  be  raised  from  the  taxation  of  location 
values  of  land  merely  because  he  believed  that  this  would  be  an 
easy  way  of  raising  revenue,  and  not  because  it  would  go  very 
far  toward  the  curing  of  poverty. 

The  financial  arguments  in  favor  of  the  land  tax  are  fairly 
simple.  Land  cannot  be  hidden  in  the  way  that  much  personal 
property  is.  There  may  be  some  difficulty  in  appraising  its  value 
for  purposes  of  taxation,  but  the  difficulty  is  not  greater  than 
that  of  appraising  for  purposes  of  taxation  the  value  of  personal 
property,  buildings,  or  anything  else  which  is  taxable. 

Again,  a  tax  on  location  values  could  hardly  be  said  to  have  a 
repressive  effect  at  all.  If  the  tax  on  the  products  of  industries 
tends  to  discourage  production,  this  cannot  be  said  to  be  true 
of  land.  Since  location  values  are  not  produced  by  the  payer  of 
the  tax,  there  is  no  production  to  discourage.  You  may  tax  land 
and  still  have  it  in  undiminished  quantities.  As  a  cold-blooded 
financial  proposition  this  has  some  merit.  Even  though  one  may 
take  away  from  the  landowner  all  its  location  value,  the  land 
itself  still  exists  in  undiminished  quantities. 

Arguments  for  the  single  tax.  The  argument  for  the  single 
tax  as  an  engine  of  social  reform  rests  on  three  general  propo- 
sitions. In  the  first  place,  the  single  taxers  maintain,  since  those 
who  receive  rent  because  of  the  location  of  their  land  create 


378  ELEMENTARY  ECONOMICS 

nothing  in  return  for  the  rent  they  receive,  their  incomes  are 
merely  subtracted  from  those  of  the  rest  of  society.  If  their 
incomes  should  be  taken  away,  this  would  not  in  any  degree 
diminish  the  total  productiveness  of  the  community.  By  a  mere 
process  of  arithmetic  it  is  easy  to  show  that  if  the  incomes  which 
they  now  receive  were  divided  among  the  rest  of  the  people, 
these  other  people  would  have  larger  incomes. 

Is  land  kept  out  of  use  for  speculation?  In  the  second 
place,  it  is  alleged  that  a  great  deal  of  land  is  kept  out  of  use 
for  speculative  purposes  and  that  a  high  tax  on  land  values 
would  force  this  land  into  use.  The  validity  of  this  argument  is 
doubtful.  The  illustrations  given  are  usually  those  of  tracts  of 
land  found  lying  idle  in  cities  and  suburbs.  The  owners  are  holding 
them  apparently  in  the  hope  of  getting  a  higher  price  in  the 
future.  It  is  easy  to  jump  to  the  conclusion  that  if  there  were 
no  prospect  of  gain  by  doing  so,  the  owners  would  at  once  find 
a  use  for  the  land  or  sell  it  to  others  who  could  use  it ;  but  this 
does  not  take  into  consideration  the  fact  that  there  may  be  no 
immediate  use  to  which  the  owner  could  profitably  put  the  land. 

The  only  common  cases  in  which  the  land  is  actually  kept 
out  of  use  because  of  speculation  are  where  garden  land  is  pur- 
chased and  divided  into  building  lots  in  advance  of  the  demand 
for  them.  After  the  division  has  been  made  the  land  is  no 
longer  suitable  for  farm  land  or  garden  tracts  because  it  is 
broken  up  into  parcels  too  small  to  be  cultivated  economically. 
Meanwhile  the  public  may  be  slow  in  buying  the  lots  for  building. 
The  result  is  that  for  a  number  of  years  this  land  practically 
goes  to  waste. 

A  heavy  tax  on  land  would  exempt  other  forms  of  property. 
A  third  argument  for  the  single  tax  is  to  the  effect  that  when 
a  large  amount  of  revenue  is  raised  from  a  tax  on  land,  there 
is  no  necessity  for  so  high  a  tax,  probably  no  necessity  for  any 
tax  whatever,  on  other  things.  This  reduction  of  taxation  on 
other  forms  of  property  would  serve  as  a  stimulus  to  greater 
production.  When,  for  instance,  a  farmer  finds  that  his  cattle, 
his  crops,  and  his  buildings  are  not  taxed,  or  not  taxed  so 


THE  SINGLE  TAX  379 

heavily,  he  is  encouraged  to  develop  these  forms  of  property. 
If,  as  stated  above,  the  taxation  of  location  values  of  land 
enables  the  public  to  raise  enough  revenue  from  this  source,  and 
thereby  to  eliminate  the  taxes  on  all  other  things,  this  will  tend 
to  stimulate  business  and  production  in  general.  This  argument 
is  based  on  the  repressive  character  of  other  forms  of  taxation 
than  the  land  tax. 

Putting  idle  talent  to  work.  A  fourth  argument,  not  usually 
brought  forward  by  single  taxers,  may  be  added  to  this  list. 
In  so  far  as  certain  owners  of  valuable  land  are  enabled  to  live 
on  the  rent  which  comes  to  them  because  of  its  location  value, 
and  to  remain  idle  instead  of  doing  productive  work,  the  com- 
munity loses  the  productive  power  of  these  men.  This  is  more 
important  than  all  the  land  kept  out  of  use  for  speculative 
purposes.  If  such  persons  were  deprived  of  their  incomes  and 
thereby  forced  to  do  productive  work,  the  community  would 
gain  by  this  addition  to  its  list  of  productive  workers.  This 
would  make  for  national  prosperity. 

EXERCISES 

1.  What  is  meant  by  the  single  tax? 

2.  Who  were  the  original  advocates  of  the  single  tax? 

3.  On  what  ground  did  they  advocate  it? 

4.  Has  it  generally  been  recognized  that  rent  is  a  peculiar  income  ? 

5.  By  whom  was  the  single  tax  made  an  engine  of  social  reform  ? 

6.  What  is   the  distinction  between   location   value   and   fertility 
value  in  land? 

7.  Do  all  single  taxers  wish  to  tax  both  forms  of  value? 

8.  Are  there  any  reasons  for  distinguishing  between  these  two  parts 
of  the  value  of  land? 

9.  What  are  the  leading  arguments  for  the  single  tax? 

10.  Is  land  commonly  held  out  of  use  for  speculative  purposes  ? 

11.  Are  men  ever  enabled  to  live  without  work  because  they  are 
able  to  live  on  the  rent  of  land? 


CHAPTER  XLVI 
ANARCHISM 

Anarchism  and  socialism.  In  some  respects  anarchism  is  the 
diametric  opposite  of  socialism ;  in  other  respects  it  is  somewhat 
similar  to  socialism.  They  represent  opposite  tendencies  in  that 
the  socialist  proposes  to  enlarge  the  power  and  function  either 
of  the  state  or  of  some  kind  of  public  organization,  whereas  the 
anarchist  proposes  to  eliminate  all  authority,  or  all  control  of 
one  person  by  another.  Such  organization  as  shall  exist  under 
anarchism  shall  be  purely  voluntary.  Voluntary  groups  may  be 
formed  as  large  or  as  small  as  the  individual  members  care  to 
have  them.  The  relations  of  one  group  to  another  shall  likewise 
be  on  a  purely  voluntary  basis.  There  shall  be  no  state  with  a 
military  arm  or  with  police  power  of  any  kind. 

Anarchism  and  socialism  resemble  each  other  in  that  both 
profess  to  revolt,  either  in  part  or  in  whole,  against  any  system 
which  gives  one  man  power  or  authority  over  another.  Many  of 
the  advocates  of  socialism  object  to  private  capital  primarily  on 
the  ground  that  it  gives  one  man,  namely  the  capitalist  employer, 
power  and  authority  over  another  man,  the  propertyless  laborer. 
The  anarchist  says,  regarding  this  opinion :  It  is  good  so  far 
as  it  goes.  We  anarchists  are  likewise  opposed  to  giving  one 
man  power  or  authority  over  another.  The  private  ownership 
of  capital  does  what  the  socialist  says  it  does,  and  that  is 
wrong.  We  are  therefore  opposed  to  the  private  ownership  of 
capital.  But  capital  is  not  the  only  source  of  authority.  The 
government  likewise  gives  one  man  power  or  authority  over 
another;  the  capitalist  employer  does  not  in  fact  have  as  much 
power  or  authority  as  a  judge  or  a  policeman,  a  governor  or  a 
president.  The  socialist,  therefore,  is  only  a  halfway  anarchist. 
He  is  opposed  to  one  source  of  power  and  authority ;  we  are 

380 


ANARCHISM  381 

opposed  to  both  sources.  On  this  point  the  anarchist  is  undoubt- 
edly more  logical  than  the  socialist. 

May  government  eventually  become  unnecessary  ?  The 
underlying  philosophy  of  anarchism  is  of  various  kinds.  There 
is  one  system  of  thought  which  is  frequently  but  improperly 
called  anarchistic.  It  is  held  by  certain  people  that  government 
and  compulsion  are  made  necessary  by  the  imperfections  in  human 
nature, — that  if  we  were  so  highly  developed  morally  that  each 
individual  would  voluntarily  do  what  he  ought  to  do  or  what  was 
in  the  public  interest,  then  it  would  not  be  necessary  to  use 
authority  or  compulsion  on  anybody ;  but  since  there  are  indi- 
viduals with  undeveloped  moral  natures, — individuals  who  do 
not  voluntarily  and  automatically  respond  to  the  needs  of 
society, —  it  is  therefore  necessary  that  they  be  compelled  to  do 
what  they  ought  to  do,  or  (which  is  the  same  thing)  what  they 
would  do  if  they  w-ere  fully  developed. 

Whether  this  delectable  state  is  to  be  reached  by  the  slow  and 
somewhat  cruel  process  of  evolution  or  by  the  process  of  moral 
reform  and  religious  evangelism  may  be  open  to  speculation. 
There  are  probably  not  many  people  who  would  disagree  with 
the  general  conclusion  that  government  would  be  unnecessary  in 
either  case.  If  (but  this  is  a  large  if)  human  nature  could  be  so 
perfected,  either  by  the  slow  elimination  of  the  unsocial  and  the 
antisocial  (that  is,  the  criminal  and  the  immoral)  or  by  their 
moral  regeneration,  it  might  very  easily  follow  that  government 
would  ultimately  become  unnecessary  or  at  least  that  compulsion 
by  governmental  authority  would  become  a  thing  of  the  past. 
This  position,  however,  can  hardly  be  called  anarchistic  in  any  real 
sense,  for  the  real  anarchist  believes,  not  that  government  may 
ultimately  become  unnecessary  but  that  it  is  now  unnecessary. 

Impatience  of  restraint.  There  is  another  type  of  thought, 
sometimes  characterized  as  anarchistic,  which  does  not  revolt  so 
much  against  government  and  the  use  of  compulsion  in  the  form 
of  police  power  as  against  what  is  called  moral  compulsion ; 
that  is,  the  setting  up  by  society,  or  by  people  in  authority,  of 
standards  which  others  are  bound  to  follow.     It  is  proposed. 


382  ELEMENTARY  ECONOMICS 

therefore,  that  we  throw  off  the  so-called  shackles  of  convention- 
ality and  even  of  morality  and  that  everyone  do  that  which  is 
right  in  his  own  eyes,  regardless  of  what  may  be  said  by  other 
people  or  by  institutions  and  organizations  which  pretend  to 
tell  us  what  we  ought  to  do. 

Is  morality  an  invention  of  weaklings  to  curb  the  strong  ? 
Among  the  people  who  take  this  point  of  view,  however,  two 
diametrically  opposite  conclusions  are  reached.  There  is  one 
school  represented  by  such  writers  as  Kaspar  Schmidt  and  Fried- 
rich  Nietzsche,  who  hold  that  religion  and  morality  are  the 
inventions  of  the  weaklings  of  the  world  for  the  purpose  of  hold- 
ing the  strong  in  check.  There  is  an  old  fable  regarding  the  mice 
who  found  themselves  oppressed  by  the  cat.  They  voted  unani- 
mously that  the  cat  should  wear  a  bell  in  order  that  the  mice 
might  be  protected.  According  to  these  writers  religion  and 
morality  are  merely  different  ways  by  which  mice  try  to  put  the 
bell  on  the  cat.  They  try  to  make  it  unpopular  for  the  strong 
man  to  use  his  strength.  They  persuade  him  that  it  is  immoral 
or  irreligious,  or  that  the  vengeance  of  supernatural  agencies 
will  be  let  loose  upon  him  if  he  exercises  his  strength  to  the 
detriment  of  the  masses.  Therefore  the  strong  man,  sometimes 
called  the  superman,  should  break  loose  from  these  convention- 
alities, should  snap  the  cords  with  which  the  Lilliputians  have 
bound  him,  and  should  dare  to  be  great  and  independent  and 
impose  his  will  on  the  masses  if  he  is  able  to  do  so. 

Is  morality  an  invention  of  those  in  power  to  curb  the 
masses  ?  The  other  school  of  anarchists,  and  certain  socialists 
who  are  anarchistic  in  spirit  if  not  in  program,  assert  that  religion 
and  morality  are  the  cunning  inventions  of  priests  and  soldiers 
and  capitalists  to  hold  the  masses  in  check;  that  for  the  aver- 
age man  to  be  good  is  merely  to  be  good  for  somebody  else — 
that  is,  for  those  in  power;  that  to  be  good  is  to  support  the 
priest  or  the  capitalist  or  the  policeman  or  the  judge  or  someone 
in  authority ;  that  to  be  free  is  to  be  good  to  oneself. 

As  to  which  of  these  two  conclusions  is  the  more  absurd,  it 
would  be  difficult  to  decide.     They  are  mentioned  to  show  to 


ANARCHISM  383 

what  extremes  of  aberration  the  human  mind  is  capable  of  going. 
One  doctrine  would  lead  the  strong  man  to  do  as  he  pleased,  to 
impose  his  will  upon  his  neighbors  either  by  the  weight  of  his  fist 
or  by  his  superior  power  of  destruction  in  some  other  form ;  the 
other  conclusion  would  lead  the  masses  of  the  people  to  sink  into 
a  state  of  license  and  violence  which  would  destroy  civilization 
and  land  us  in  a  sort  of  primeval  social  chaos. 

Are  all  human  interests  harmonious  ?  There  is,  however, 
another  system  of  thought  which  is  truly  anarchistic  and  less 
repulsive  than  either  of  these.  This  system  is  based  on  the 
fundamental  assumption  that  all  human  interests  are  harmonious. 
In  this  best  of  all  possible  worlds,  it  is  claimed,  there  can  be  no 
such  thing  as  a  conflict  of  human  interests ;  it  is  in  some  way 
a  reflection  upon  the  Creator  of  the  world  to  say  that  there  could 
be  anything  but  a  harmony  of  real  interests  among  men ;  it 
cannot  possibly  be  true  that  one  man's  meat  is  another  man's 
poison ;  these  apparent  conflicts  are  the  creation  of  men  and  human 
institutions  and  are  not  inherent  in  the  nature  of  man  and  the 
universe. 

This  underlying  assumption  sounds  attractive,  and  doubtless 
many  of  us  would  like  to  believe  it  if  we  could.  There  are,  how- 
ever, so  many  hard  facts  in  the  way  that  not  many  of  us  are  able 
to  bring  ourselves  to  the  point  of  ignoring  the  very  present  and 
prevalent  conflict  of  interests.  It  was  shown  in  the  chapter  on 
Scarcity  that  the  mere  fact  of  a  congestion  of  population — 
of  too  many  people  trying  to  live  in  one  spot — creates  in 
that  spot  a  state  of  scarcity.  Food  enough  in  that  particular 
spot  cannot  be  produced  for  as  many  people  as  would  like  to 
live  there.  This  situation  in  itself  inevitably  and  necessarily 
produces  a  conflict  of  interests.  Either  some  people  must  move 
to  another  spot  or  food  must  be  brought  from  other  spots  to 
feed  the  people  who  are  there.  Either  alternative  will  prove 
disagreeable  to  somebody.  If  neither  of  these  alternatives  is 
chosen,  then  there  must  be  hunger ;  more  than  one  person  will  be 
wanting  each  parcel  of  food,  and  that  in  itself  is  a  conflict  of 
interests.    Here  are  certain   facts  of  a  physical  nature  which 


384  ELEMENTARY  ECONOMICS 

cannot  by  any  effort  of  the  will  or  the  imagination  be  conjured 
out  of  existence.  There  is,  in  fact,  a  conflict  of  interests  wherever 
two  people  want  the  same  thing. 

Conflict  of  interests  makes  control  necessary.  Wherever 
there  is  a  conflict  of  interests,  one  of  two  things  is  absolutely 
necessary :  either  the  individuals  must  have  a  high  moral  develop- 
ment, which  will  lead  each  one  to  surrender  certain  interests  in 
favor  of  others,  or  there  must  be  an  umpire  to  decide  between 
them  and  enforce  his  decision.  This  umpire,  by  whatever  name 
he  may  be  called,  exercises  the  function  of  government,  and,  in 
fact,  this  umpire  is  the  government. 

Emotional  anarchism.  There  is  another  type  of  anarchism 
which  can  scarcely  be  said  to  have  any  underlying  philosophy. 
It  is  based  wholly  on  feeling  and  sentiment.  Doubtless  every 
human  being  possesses  some  repugnance  toward  being  ruled,  or 
being  compelled  to  do  that  which  he  dislikes  to  do,  or  to  leave 
undone  that  which  he  would  like  to  do,  A  preference  for  one's 
own  way  shows  itself  rather  early  in  the  lives  of  children.  Doubt- 
less all  of  us  feel  bitter  at  times  regarding  some  act  of  a  govern- 
ing agency  or  authority.  Generally,  however,  we  are  able  to 
keep  these  feelings  under  sufficient  control  to  enable  us  to 
obey  law  and  support  the  government.  In  other  words,  we 
generally  see  the  necessity  of  government,  however  disagreeable 
it  is  at  times  to  be  forced  to  submit.  Occasionally,  however,  an 
individual  will  react  in  the  other  way ;  that  is,  his  repugnance 
will  overcome  his  judgment.  He  has  no  particular  philosophy, 
though  he  can  always  invent  a  reason  or  an  excuse.  A  policeman, 
a  court,  or  a  flag,  or  any  other  evidence  of  symbol  of  government 
is  as  a  red  flag  in  his  face ;  it  causes  anger,  resentment,  and 
insurgency,  and  nothing  else.  Such  people  are  sorrietimes  very 
adorable  in  other  respects.  So  long  as  their  feelings  are  properly 
soothed  they  may  be  exceedingly  affectionate  and  loving.  Those 
who  know  them  personally  find  it  difficult  to  reconcile  their 
general  personal  qualities  with  their  feeling  against  government. 
Nevertheless,  from  any  broad  and  philosophical  point  of  view 
they  are  among  the  most  dangerous  members  of  society.    They 


ANARCHISM  385 

are  the  unadapted  in  a  very  important  social  sense.  Mentally 
and  morally  they  are  as  unfit  for  living  under  a  settled,  orderly 
government  as  a  fish  is  physically  unfit  for  living  out  of  water. 
The  process  of  evolution  which,  according  to  some  writers,  would 
eventually  produce  the  delectable  state  of  society  in  which  all 
would  think  and  feel  alike  is  steadily  weeding  such  people  out. 
They  insist  on  bumping  their  heads  against  the  walls  of  the  uni- 
verse and  destroying  themselves  along  with  the  criminals  and 
others  who  are  unadapted  to  a  settled  civil  life. 

There  is  still  another  tj'pe  of  anarchist  who  is  merely  mean  and 
bent  on  making  trouble.  He  can  always  be  relied  upon  to  be 
on  the  wrong  side  of  every  question.  Wherever  decent,  self- 
respecting  men  and  women  are  in  general  agreement  on  any 
subject,  he  will  always  be  found  opposing  them.  It  is  true,  he 
does  not  always  go  in  for  anarchism.  He  is  found  in  every  move- 
ment which  gives  him  a  chance  to  vent  his  general  hate  and  spite- 
fulness.  Wherever  there  is  a  chance  to  denounce  government, 
religion,  law,  order,  morality,  chastity,  sobriety,  or  anything  else 
that  is  of  good  repute,  his  voice  is  always  heard.  He  generally 
tries  to  get  into  good  company  by  calling  himself  a  radical, 
an  iconoclast,  or  a  revolutionist,  knowing  that  excellent  men  and 
women  have  been  called  by  all  of  these  names. 

Is  patriotism  a  vice  ?  There  are  various  other  views,  some 
of  them  of  an  idealistic  nature,  which  savor  of  anarchism  and 
lead  to  absurd  conclusions  on  practical  subjects.  One  of  these 
is  that  patriotism  is  a  vice.  This  strange  doctrine  is  advanced 
on  grounds  of  the  broadest  humanitarianism.  We  should  love 
all  men  equally,  it  is  urged,  without  regard  to  race,  color,  creed, 
or  nationality.  The  patriot  cares  more  for  his  fellow  citizens 
than  for  the  citizens  of  other  countries;  therefore,  according  to 
this  type  of  anarchism,  he  is  narrow  in  his  views.  ^loreover,  if 
he  thinks  more  of  his  fellow  citizens  than  of  others,  this  will  lead 
him,  in  case  of  war,  to  try  to  kill  the  citizens  of  the  enemy 
country.  Killing,  it  is  argued,  is  murder.  The  fact  that  it  is 
done  as  an  act  of  war  does  not  in  the  slightest  degree  change  its 
character. 


386  ELEMENTARY  ECONOMICS 

When  a  great  world  state  exists,  then,  of  course,  it  will  be  proper 
to  be  patriotic  toward  it.  We  may  even  work  consistently  for  it. 
But  to  condemn  all  patriotism  for  lesser  states  would,  if  this  con- 
demnation were  effective,  merely  destroy  existing  states  and  all 
law  and  order,  and  land  the  world  in  chaos.  Family  sentiment 
is  narrow  in  the  same  sense  that  national  sentiment  is  narrow. 
The  man  who  loves  his  wife  must  care  more  for  her  than  for  other 
women.  This  and  all  other  forms  of  family  sentiment  may,  in  a 
sense,  make  us  narrow,  but  it  does  not  follow  that  it  is  bad  to 
be  narrow.  Again,  if  we  are  to  avoid  narrowness,  why  be  human- 
itarians ?  Are  not  many  animals  also  companionable  and  lovable  ? 
To  show  a  preference  for  men  is  to  be  narrow  in  the  sense  in 
which  these  people  use  that  word. 

EXERCISES 

1.  What  is  anarchism? 

2.  How  does  it  differ  from  socialism? 

3.  Is  one  an  anarchist  merely  because  he  believes  that  government 
may  eventually  become  unnecessary? 

4.  Is  a  believer  in  the  millennium  an  anarchist? 

5.  What  type  of  anarchist  holds  to  the  belief  that  morality  is  an 
invention  of  weaklings  to  curb  the  strong? 

6.  What  type  believes  that  morality  is  an  invention  of  those  in 
power  to  curb  the  masses? 

7.  Are  all  human  interests  harmonious  ? 

8.  If  not,  is  there  need  of  an  umpire? 

9.  WTiat  is  meant  by  emotional  anarchism? 

10.  Does  the  anarchist  hold  that  patriotism  is  a  vice  or  a  virtue? 


CHAPTER  XLVII 
CONSTRUCTIVE  LIBERALISM 

What  the  liberalist  believes.  A  liberalist  in  economics  is  one 
who  believes  in  the  freedom  of  the  individual  rather  than  in  com- 
pulsion. He  believes  that  individuals  will,  without  compulsion 
and  by  voluntary  agreement,  do  most  of  the  things  that  are  neces- 
sary to  provide  for  the  needs  of  the  community.  He  believes  that 
it  is  not  necessary  continually  to  impose  upon  the  individual  the 
authority  either  of  a  benevolent  despot  or  of  a  well-meaning 
majority.  In  such  extreme  cases  as  can  be  covered  by  the  criminal 
law,  laws  for  the  prevention  of  violence  and  fraud,  for  the  en- 
forcement of  contracts,  and  laws  for  the  standardization  of  various 
aspects  of  business,  compulsion  is  necessary  and  helpful.  He 
believes  that  the  interests  of  the  public  are  expressed  quite  as 
accurately  on  the  market  and  through  the  price  lists  as  through  the 
ballot  box  and  the  statute  books.  He  even  believes  that  poverty 
and  most  of  the  social  ills  can  be  eliminated  under  the  system  of 
voluntary  agreement — freedom  to  accumulate,  to  own,  and  to 
operate  private  property — and  without  subjecting  individuals 
to  the  necessity  of  becoming  government  employees. 

Freedom  versus  compulsion.  There  are  only  two  ways  of 
getting  men  to  do  what  is  necessary  for  the  prosperity  of  the 
nation :  one  is  to  induce  them  by  the  offer  of  a  reward  either  of 
a  material  or  of  an  immaterial  kind ;  the  other  is  to  compel  them 
by  authority.  For  example,  an  army  can  be  recruited  and  men  led 
to  fight  for  their  country  either  by  the  volunteer  system  or  by 
conscription.  The  industrial  army  may  likewise  be  recruited  by 
either  method.  The  one  is  the  method  of  freedom ;  the  other  is 
the  method  of  compulsion.  Men  may  be  induced  to  work  on  tht 
farms  and  in  the  factories  and  mines  by  the  offer  of  wages,  profits, 
etc.,  or  they  may  be  directed  by  authority  to  do  so. 

387 


388  ELEMExXTARY  ECONOMICS 

If  no  one  were  allowed  to  accumulate  capital  or  to  own  a  farm,  a 
factory,  or  any  kind  of  business  property,  we  should  have  much 
less  freedom  to  choose  our  own  occupations  and  to  direct  our- 
selves than  we  have  under  a  system  of  free  private  enterprise  and 
voluntary  agreement.  Under  a  regime  of  complete  government 
ownership  and  operation  men  would  have  to  be  chosen  by  au- 
thority for  the  higher  as  well  as  for  the  lower  positions  in  the 
industrial  system. 

Opposed  to  socialism.  That  there  would  be  less  freedom  under 
universal  government  ownership  than  under  private  ownership  will 
be  clear  to  anyone  who  understands  that  under  the  former  no  one 
could  even  begin  farming  on  his  own  initiative,  but  would  have  to 
be  placed  in  charge  of  a  farm  or  told  to  work  under  a  boss,  accord- 
ing as  those  in  authority  should  decide.  Under  a  liberal  system 
anyone  who  can  handle  a  farm  successfully  can  become  a  farm 
manager  and  ultimately  a  farm  owner,  as  thousands  have  already 
done.    The  same  may  be  said  of  other  industries. 

The  liberalist  believes  that,  in  general,  the  volunteer  plan  is 
better  than  the  compulsory  one.  There  are,  of  course,  occasions 
when  compulsion  becomes  necessary,  but  these  are  usually  occa- 
sions of  acute  and  instant  necessity,  when  there  is  not  time  for 
the  market  to  adjust  itself  and  to  organize  a  volunteer  system. 

In  time  of  war  compulsion  takes  the  place  of  freedom. 
Socialists  are  in  the  habit  of  saying  that  in  time  of  war  nations 
turn  to  socialism.  It  is  true  that  in  time  of  war  compulsion  is 
generally,  or  at  least  to  a  considerable  degree,  substituted  for 
freedom;  but  the  whole  business  of  war  is  compulsion.  Our  deal- 
ing with  foreign  enemies  is  necessarily  on  a  compulsory  rather 
than  on  a  voluntary  and  contractual  basis,  and  the  whole  organi- 
zation of  society  may  have  to  be  changed  from  freedom  to  com- 
pulsion in  order  to  carry  on  the  compulsory  business  of  war. 

There  are  a  multitude  of  minor  forms  of  compulsion  besides 
war  itself.  Taxation  is  a  compulsory  payment  of  money  to  the 
government.  Conscription  is  compulsory  military  service.  Forced 
loans  are  compulsory  in  a  high  degree.  The  censorship  of  the 
press  is  merely  compulsory  regulation  of  the  business  of  selling 


CONSTRUCTIVE  LIBERALISM  389 

talk  for  private  profit.  It  may  be  necessary,  in  order  to  prosecute 
a  war  successfully,  to  resort  to  compulsion  in  recruiting  munition 
factories  and  even  farms.  Rationing  the  population  in  time  of 
food  scarcity  may  be  necessary. 

Compulsion  cannot  create  equality.  In  a  regime  of  universal 
compulsion  some  must  necessarily  be  treated  better  than  others. 
Even  though  conscription  be  carried  out  without  personal  favor, 
the  result  works  to  the  disadvantage  of  those  drawn  by  conscrip- 
tion as  compared  with  those  not  drawn.  Those  on  whom  the  lot 
falls  act  as  shock-absorbers  for  the  rest  of  the  community.  There 
is  nothing  particularly  democratic  about  this,  though  it  may  be 
the  best  possible  way  of  meeting  a  national  crisis.  Under  sucK" 
conditions,  when  the  life  of  a  nation  is  at  stake,  it  does  not  stop 
for  the  niceties  of  social  justice.  Necessity  knows  no  law.  It  is 
probable,  however,  that  as  a  result  of  several  years  of  this  com- 
pulsion there  would  be  so  much  dissatisfaction  and  sense  of 
unfairness  as  to  provoke  a  strong  reaction  against  compulsion  and 
in  favor  of  the  volunteer  system,  not  only  in  the  work  of  fighting 
but  in  business  and  industrial  pursuits  as  well.  We  might  con- 
sider ourselves  fortunate  if  this  reaction  did  not  carry  us  too  far 
in  the  direction  of  license  and  impatience  with  all  restraint. 

Dangers  of  freedom.  Freedom  of  trade — freedom  to  buy  and 
sell,  to  offer  and  accept  rewards — is  a  part  of  the  program  of 
liberalism.  There  are,  however,  some  very  serious  results  which 
accompany  freedom  of  bargaining.  The  advantage  in  bargaining 
is  always  on  the  side  of  those  who  are  trying  to  sell  something 
which  is  undersupplied  or  of  those  who  are  tning  to  buy  some- 
thing which  is  oversupplied.  When  there  is  a  long-continued 
oversupply  of  certain  commodities  or  of  certain  kinds  of  labor, 
those  who  are  under  the  disadvantage  of  trying  to  sell  them  feel, 
naturally  enough,  that  they  are  playing  a  losing  game.  They  are 
frequently  willing  to  take  their  chances  under  some  form  of 
compulsion,  feeling  that  they  could  not  be  much  worse  off  than 
they  are  under  the  system  of  free  contract. 

The  situation  of  those  trying  to  sell  something  that  is  over- 
supplied,  especially  if  it  happens  to  be  labor,  is  summarized  in  the 


390  ELEMENTARY  ECONOMICS 

statement  that  ''liberty  is  frequently  the  liberty  to  starve."  It 
must  be  confessed  that  liberty  is  dangerous,  even  though  it  is  very 
precious.  Severe  conditions  are  imposed  on  free  men.  Liberty  to 
be  on  the  street  may  mean  liberty  to  get  run  over  by  an  automo- 
bile. Liberty  to  go  swimming  may  mean  liberty  to  drown.  Liberty 
to  sail  the  seas  may  mean  liberty  to  get  shipwrecked.  Children 
who  are  restrained  in  their  liberty  and  are  forbidden  to  be  on  the 
street  are  in  less  danger  of  being  run  over,  and  those  who  are 
prevented  from  going  in  swimming  are  in  less  danger  of  being 
drowned.  Liberty  is  a  terrible  thing,  but  at  the  same  time  it  is, 
for  grown  men,  beyond  price.  Liberty  to  buy  and  sell  may  mean 
liberty  to  become  bankrupt.  The  individual  who  has  a  guardian 
to  forbid  him  to  do  any  bargaining  whatsoever  may  be  safe  from 
bankruptcy. 

In  ordinary  times,  for  some  hundreds  of  years  back,  the  un- 
skilled laborer  has  been  at  a  disadvantage.  A  great  many  sym- 
pathetic people  have  assumed  that  there  was  something  inherent 
in  the  nature  of  labor  that  put  the  laborer  at  a  disadvantage,  and 
something  inherent  in  the  nature  of  capital  that  put  the  capitalist 
at  an  advantage  in  the  bargaining  process.  This  is  not  true,  al- 
though, as  we  have  seen  above,  conditions  have  generally  been 
more  favorable  for  the  capitalist  than  for  the  unskilled  laborer. 
But  whenever  and  wherever  unskilled  labor  has  been  hard  to  find, 
the  advantage  has  been  quite  as  much  on  the  side  of  the  unskilled 
laborer,  and  the  disadvantage  quite  as  much  on  the  side  of  the 
employer. 

Whenever  it  has  been  possible  for  an  employer  to  hang  out  his 
shingle  saying  ''  Men  Wanted "  and  have  ten  men  apply  for  each 
position,  the  conditions  have  been  favorable  for  the  employer  and 
unfavorable  for  the  laborer.  The  fact  that  there  are  more  men 
applying  for  jobs  than  there  are  jobs  to  be  had  is  a  sure  indication 
of  an  oversupply  of  labor.  The  case  is  parallel  to  that  which 
would  exist  if  a  buyer  of  wheat  could  hang  out  a  sign  "Wheat 
Wanted"  and  have  many  times  more  wheat  offered  than  he  could 
buy.  That  would  be  a  sure  indication  of  the  oversupply  of  wheat. 
On  the  other  hand,  if  a  farmer  should  put  up  a  sign  which  read 


CONSTRUCTIVE  LIBERALISM  391 

"Wheat  for  Sale"  and  find  that  many  more  buyers  than  he  could 
supply  were  coming  to  purchase  wheat,  that  fact  would  indicate  an 
undersupply  of  wheat.  Similarly,  if  a  laborer,  by  putting  out  a 
sign  "Job  Wanted"  should  have  several  employers  coming  after 
him,  this  fact  would  indicate  an  undersupply  of  labor. 

Making  the  advantages  even  on  both  sides.  The  policy  of 
the  constructive  liberalist  is  indicated  by  these  observations.  It  is 
his  opinion  that  conditions  can  be  created  under  which  the  average 
employer  will  find  it  as  hard  to  get  a  man  to  work  for  him  at 
liberal  wages  as  the  man  will  find  it  to  get  an  employer  to  hire  him 
at  those  wages.  When  that  is  accomplished  the  advantages  in 
bargaining  will  be  about  even.  Labor  would  no  longer  be  under  a 
handicap  in  the  bargaining  process.  Laborers  will  no  longer  feel 
the  need  of  some  compulsory  restriction  upon  bargaining,  but  will 
feel  quite  able  to  take  care  of  themselves  without  help  from  the 
government  or  any  other  compulsory  agency. 

A  program  looking  in  this  direction  may  take  a  little  longer  to 
work  out,  but  from  the  point  of  view  of  the  constructive  liberalist 
the  results,  once  achieved,  are  vastly  preferable  to  any  achieved 
under  a  compulsory  system.  There  is  an  old  story  about  a  wagoner, 
one  of  whose  wheels  got  into  a  deep  rut.  Instead  of  trying  to 
extricate  it,  he  sat  down  by  the  side  of  the  road  and  called  upon 
Hercules  to  aid  him.  The  story  goes  that  Hercules  replied  that  if 
the  man  would  put  his  shoulder  to  the  wheel,  he  could  get  out  of 
the  difficulty  without  calling  on  outside  help.  This,  according  to  the 
liberalist,  represents  a  general  tendency  in  human  nature.  The 
government  is  our  Hercules,  and  whenever  we  get  into  difficulties 
we  are  in  the  habit  of  sitting  down  and  crying  vociferously  for 
the  government  to  come  and  do  something. 

"Doing  something"  for  people.  Beneficence,  is,  of  course, 
a  characteristic  of  good  government ;  but  many  of  us,  according 
to  the  liberalist,  have  never  reached  the  point  where  we  can  under- 
stand that  a  "beneficent  letting  alone"  is  sometimes  the  most 
beneficent  thing  the  government  can  give  us.  There  are  many 
people  who  feel  that  when  they  are  ill  the  doctor  must  "do  some- 
thing."  They  do  not  realize  that  sometimes  the  most  beneficent 


392  ELEMENTARY  ECONOMICS 

thing  the  doctor  can  do  is  to  do  nothing.  A  doctor  whose  desire 
is  to  please  his  patients  may  feel  under  some  compulsion  to  do 
something  for  them,  even  if  it  is  nothing  more  than  to  give  them 
bread  pills.  From  the  standpoint  of  the  liberalist  much  of  our 
so-called  social  legislation  consists  of  bread  pills. 

Sometimes,  however,  it  is  really  necessary  that  the  doctor  should 
do  something.  The  doctor  whose  skill  consists  in  his  ability  to 
cure  sickness  rather  than  to  please  patients  will  have  enough  to 
do,  provided  the  people  know  enough  to  appreciate  him.  The  same 
may  be  said  of  a  government.  There  are  a  few  really  vital  things 
that  a  government  may  do.  If  it  succeeds  in  doing  these  few 
things  well,  it  will  then  be  unnecessary  to  do  the  thousand  and 
one  trivial  things  that  it  is  asked  to  do. 

So  far  as  this  countr}'^  is  concerned,  probably  the  most  far- 
reaching  and  constructive  piece  of  legislation  in  the  last  generation 
has  been  the  restriction  of  immigration.  This  is  one  of  the  few 
acts  of  the  government  which  go  directly  to  the  root  of  the  diffi- 
culty of  low  wages  and  poverty.  It  is  an  act  which  definitely  aims 
at  preventing  an  oversupply  of  unskilled  labor  such  as  formerly 
existed.  It  is  true  that  it  does  not  go  far  in  this  direction,  but 
at  least  it  indicates  to  the  public  that  the  government  has  recog- 
nized the  source  of  the  difficulty  and  is  no  longer  proceeding  on 
general  guesswork  in  an  attempt  to  overcome  it.  If  it  will  go 
a  little  farther  in  the  same  direction,  it  will  make  unskilled  labor 
permanently  so  scarce  and  hard  to  find  that  the  unskilled  laborer 
will  no  longer  be  at  a  disadvantage,  but  can  bargain  on  even  terms 
with  employers  and  secure  high  wages  for  himself  without  help 
from  anybody. 

A  low  standard  of  living  and  a  high  birth  rate.  But  im- 
migration from  Europe  and  Asia  is  not  the  only  source  of  over- 
supply  of  unskilled  labor.  The  high  birth  rate  among  the  ignorant 
and  unskilled  is  another  large  source  of  cheap  labor.  Nothing, 
apparently,  but  a  rise  in  the  standard  of  living  will  reduce  the 
volume  of  this  stream.  A  rise  in  the  standard  of  living  means  an 
increase  in  the  number  of  things  which  the  average  man  or  woman 
thinks  necessary  to  the  support  of  the  family.   The  more  things 


CONSTRUCTIVE  LIBERALISM  393 

they  feel  they  must  have  before  they  can  marry  and  support  a 
family,  the  longer  they  will  postpone  marriage.  The  longer  they 
put  off  marrying,  the  smaller  number  of  children  there  will  be  in 
the  family,  partly,  at  least,  because  the  child-bearing  period  of  the 
wife  is  reduced.  If  the  age  of  marriage  is  raised  on  the  average 
from  eighteen  to  twenty-three,  there  are  five  less  years  during 
which  the  wife  may  bear  children. 

Families  too  small  among  the  educated  classes.  The  restric- 
tion of  immigration  among  the  ignorant  and  unskilled,  of  course, 
has  nothing  to  do  with  the  restriction  of  immigration  among  the 
educated  and  skilled.  The  latter  are  as  free  to  come  as  when  im- 
migration was  unrestricted.  Similarly,  a  rise  in  the  standard  of 
living  among  the  ignorant  and  unskilled  has  nothing  to  do  with 
the  marriage  and  the  birth  rate  among  the  educated  and  skilled. 
Among  the  latter  classes  the  reform  ought  to  proceed  in  quite  the 
opposite  direction.  There  is  no  doubt  that  among  these  people 
marriages  are  postponed  too  long,  and  the  average  families  are 
too  small. 

Increasing  the  supply  of  employers.  The  decrease  in  the 
number  of  people  born  with  the  heredity  and  prospective  training 
which  fit  them  for  skilled  positions  and  for  positions  in  the  ranks 
of  the  employing  class  tends  to  reduce  the  demand  for  unskilled 
labor.  Hitherto  unskilled  laborers  have  suffered  from  two  causes : 
the  fact  that  there  have  been  too  many  unskilled  laborers,  and  the 
fact  that  there  have  been  too  few  employers.  It  is  as  though,  in 
the  badly  balanced  ration  of  an  individual  or  an  animal,  the  too 
abundant  ingredient,  say  starch,  were  to  be  increased  more  and 
more,  and  the  too  scarce  ingredient,  say  protein,  were  to  be  de- 
creased more  and  more.  The  combined  result  of  increasing  the  one 
and  decreasing  the  other  would  produce  a  more  and  more  un- 
balanced ration,  to  the  detriment  of  the  man  or  the  animal  that 
was  being  fed.  The  continuous  increases  in  the  ranks  of  the  un- 
skilled laborer  through  immigration,  together  with  the  high  birth 
rate,  and  the  decrease  in  the  highly  skilled  and  managerial  labor 
through  the  postponement  of  marriage  and  various  other  causes, 
have  tended  in  the  past  to  produce  a  progressively  unbalanced 


394  ELEMENTARY  ECONOMICS 

population,  tending  to  make  unskilled  labor  cheap  and  to  make 
highly  skilled  and  managerial  talent  dear. 

Fortunately  the  effect  of  this  combination  of  processes  has  been 
offset,  at  least  partially,  by  our  system  of  popular  education.  Such 
a  system  of  universal  and  popular  education  has  the  effect  of  re- 
distributing talent,  of  taking  young  people  who  would  otherwise 
have  remained  in  the  ranks  of  the  unskilled,  and  training  them 
for  the  ranks  of  the  skilled,  the  managing  and  the  enterprising 
class.  This  tends  to  reduce  the  supply  of  ignorant  laborers  and 
increase  the  supply  of  educated  workers.  If  the  system  of  popular 
education  continues  to  improve,  and  greater  and  greater  restric- 
tions are  placed  upon  the  importation  of  unskilled  labor,  and  a 
higher  standard  of  living  is  acquired  by  our  own  unskilled  labor- 
ers, the  combined  results  of  these  three  changes  will  tend  to  make 
unskilled  labor  scarce  and  hard  to  find,  to  make  jobs  abundant 
and  easy  to  find,  and,  for  both  reasons,  to  give  the  unskilled 
laborer  the  advantage  not  only  of  retaining  his  liberty  of  contract 
but  also  of  prospering  under  it.  If  we  carry  out  our  educational 
policy  to  its  logical  limit  and  train  not  only  skilled  laborers  but 
also  managers  and  employers,  and  at  the  same  time  create  a  more 
rational  standard  of  living  and  better  moral  conditions  among 
these  classes,  the  combined  results  of  these  two  policies — that  is, 
training  men  for  the  high  positions  and  encouraging  larger  families 
among  them — will  so  increase  the  numbers  of  the  managerial  class 
as  to  take  away  its  present  advantage  in  the  bargaining  process. 
By  following  this  general  process  throughout  all  ranks  of  society 
we  may  expect  in  a  short  time  so  to  balance  the  advantages  of 
bargaining  as  to  give  us  something  approximating  equality  without 
substituting  compulsion  for  freedom. 

Thrift  and  the  laborer.  The  encouragement  of  thrift  will  tend 
in  the  same  direction  and  will  accelerate  the  process  of  putting 
unskilled  labor  in  a  position  to  prosper  under  freedom.  It  is 
through  thrift  that  capital  accumulates.  WTien  capital  becomes 
so  abundant  that  the  average  owner  of  capital  has  great  difficulty 
in  finding  an  opportunity  to  use  it,  he  will  have  to  be  content  with 
a  smaller  share  in  the  products  of  industry. 


CONSTRUCTIVE  LIBERALISM  395 

The  encouragement  of  productive  enterprise,  the  frank  acknowl- 
edgment of  our  obligation  to  the  man  who  shows  the  ability  to 
plan  a  new  enterprise  and,  what  is  vastly  more  important,  to  make 
it  actually  succeed,  will  do  a  great  deal  to  expand  the  opportunities 
for  those  of  us  who  do  not  possess  that  kind  of  ability.  The  more 
such  men  we  can  develop  among  us,  the  more  our  industries  will 
expand  and  the  more  opportunities  for  remunerative  employment 
there  will  be  for  the  rest  of  us. 

Poverty  easily  curable  under  freedom.  We  need  not  have 
poverty  among  us  a  generation  longer  than  we  want  it.  By  setting 
to  work  deliberately  to  balance  our  population,  causing  ignorance 
and  lack  of  skill  to  disappear  and  causing  technical  training  and 
constructive  talent  to  increase,  we  can,  in  a  short  space  of  time, 
make  low  wages  and  poverty  a  thing  of  the  past.  WTiat  is  even 
better,  we  can  do  this  and  still  leave  everyone  a  free  man.  This 
is  the  gospel  of  the  new,  or  constructive,  liberalism  which  is  des- 
tined to  bring  relief — if  not  to  this  nation,  at  least  to  some  nation 
which  has  the  wisdom  to  adopt  it — and  which,  when  adopted,  will 
keep  that  nation  in  the  position  of  leadership  among  all  the  nations 
of  the  earth. 

A  LIBERALIST'S  PROGRAM  FOR  THE  COMPLETE  ABOLITION 
OF  POVERTY 1 

I.    Legislative  Program 

A.  For  the  redistribution  of  unearned  wealth 

1.  By  increased  taxation  of  land  values 

2.  By  a  graduated  inheritance  tax 

3.  By  control  of  monopoly  prices 

B.  For  the  redistribution  of  human  talent 

I.  By  increasing  the  supply  of  the  higher,  or  scarcer,  forms  of  talent 
(a)  By  vocational  education,  especially  for  the  training  of  busi- 
ness men 
(6)  By    cutting    off   incomes    which   support    capable   men   in 
idleness 

^  Compare  the  author's  work  entitled  "  Essays  in  Social  Justice,"  chap.  xiv. 
Harvard  University  Press,  191 5. 


396  ELEMENTARY  ECONOMICS 

2.  By  decreasing  the  supply  of  the  lower,  or  more  abundant,  forms 
of  labor  power 
(a)  By  the  restriction  of  immigration 
(5)  By  the  restriction  ol  marriage 

(i)  By  the  elimination  of  defectives 

(2)  By  the  requirement  of  a  minimum  standard  income 

(c)  By  a  minimum-wage  law 

(d)  By  fixing  building  standards  for  dwellings 
C.  For  the  increase  of  material  equipment 

1.  By  increasing  the  available  supply  of  land 

2.  By  increasing  the  supply  of  capital 

(a)  By  encouraging  thrift  versus  luxury 

(b)  By  building  up  savings  institutions 

(c)  By  making  investments  safe 

II.    NONLEGISLATIVE   PROGRAM 

A.  For  raising  the  standard  of  living  among  the  laboring  classes 

1.  The  educator  as  the  rationalizer  of  standards 

2.  Thrift  and  the  standard  of  living 

3.  Industrial    cooperation    as    a    means    of    business    and    social 

education 

B.  For  creating  sound  public  opinion  and  moral  standards  among  the 

capable;  for  example, 

1.  The  ambition  of  the  family-builder 

2.  The  idea  that  leisure  is  disgraceful 

3.  The  idea  that  the  productive  Hfe  is  the  religious  and  moral  life 

4.  The  idea  that  wealth  should  be  regarded  as  a  means  of  pro- 
duction rather  than  a  means  of  gratification 

5.  The  idea  that  the  possession  of  wealth  confers  no  license  for 

luxury  or  leisure 

6.  The  idea  that  government  is  a  means,  not  an  end 

7.  Professional  standards  among  business  men 

C.  For  discouraging  vicious  and  demoralizing  developments  of  public 

opinion ;  for  example, 

1.  The  cult  of  incomp)etence  and  self-pity 

2.  The  gospel  of  covetousness  or  the  jealousy  of  success 

3.  The  idea   that   the   capitalization   of   verbosity  is   constructive 

business 


CONSTRUCTIVE  LIBERALISM  397 

EXERCISES 

1.  What  is  meant  by  a  liberalist  in  economics? 

2.  How  can  men  be  induced  to  do  things  necessary  for  the  good  of 
the  nation? 

3.  Can  any  system  of  compulsion  secure  equaUty? 

4.  What  is  meant  when  it  is  said  that  freedom  is  a  dangerous  thing? 

5.  Does  the  fact  that  it  is  dangerous  mean  that  it  is  undesirable? 

6.  Is  it  possible  to  have  equality  and  freedom  at  the  same  time? 

7.  How  can  we  have  both? 

8.  In  what  two  ways  does  thrift  benefit  the  laborer? 

9.  In  what  two  ways  does  universal  education  benefit  the  laborer? 
10.  Outline  a  liberal  program  for  the  abohtion  of  poverty. 


SUGGESTIONS  FOR  ADDITIONAL  READ- 
ING, BY  CHAPTERS 

PART  ONE.    WHAT  MAKES  A  NATION  PROSPEROUS 

Chapter  I 

Carver,  T.  N.  Principles  of  National  Economy,  chap.  i.  Ginn  and  Com- 
pany, Boston,  1921. 

Ely,  Hess,  Leith,  and  Carver.  Foundations  of  National  Prosperity, 
pp.  277-281.    The  Macmillan  Company,   1917. 

Smith,  Adam.  Wealth  of  Nations,  Book  I,  chap,  i,  pp.  4-1 1.  Everyman's 
Edition.    E.  P.  Button  &  Co.,  New  York. 

Chapter  II 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  iii. 

Marshall,  Alfred.    Principles  of  Economics  (Fifth   Edition),  Book  I, 

chap.  ii.    The  Macmillan  Company,  London,  1907. 
Smith,  Adam.   Wealth  of  Nations,  Introduction,  pp.  1-3. 
Taylor,  F.  M.   Principles  of  Economics,  pp.  1-7.    University  of  Michigan, 

1907. 

Chapter  III 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  viii. 

Carver,  T.  N.    Sociology  and  Social  Progress,  chap.  x. 

Marshall,  Alfred.  Industry  and  Trade,  Book  I,  chap.  viii.  The  Mac- 
millan Company,  London  and  New  York,   1917. 

Mill,  John  Stuart.  Principles  of  PoHtical  Economy,  Book  I,  chap,  vii, 
pp.  101-104. 

Seligman,  E.  R.  a.  Principles  of  Economics,  pp.  36-47.  Longmans,  Green 
&  Co.,  New  York,  1905. 

Chapter  IV 

Carver,  T.  N.  Principles  of  National  Economy,  chap.  vii. 
Carver,  T.  N.  Sociology  and  Social  Progress,  chap.  xxv. 
Ely,  Hess,  Leith,  and   Carver.    Foundations  of  National   Prosperity, 

pp.  310-314. 
Marshall,  Alfred.    Principles  of  Economics,  Book  IV,  chaps,  v,  vi. 
Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  I,  chap,  vii, 

pp.  104-108. 

398 


SUGGESTIONS  FOR  ADDITIONAL  READING      399 

Chapter  V 

Carver,  T.  N.    Essays  in  Social  Justice,  chaps,  ii,  v.    Harvard  University 

Press,  191 5. 
Hadley,  a.  T.    Economics,  pp.  64-96.    G.  P.  Putnam's  Sons,  New  York, 

1896. 
Marshall,  Alfred.    Industry  and  Trade,  Book  III,  chaps,  iii-x. 

Chapter  VI 

Marshall,  Alfred.    Industry  and  Trade,  Book  III,  chaps,  xi-xiii. 
Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  I,  chap,  viii, 

pp.  116-131. 
Taussig,  F.  W.    Principles  of  Economics  (1921  Edition),  Vol.  II,  chap.  Ixi, 

pp.  372-384.    The  Macmillan  Company. 
Walker,  F.  A.    Political  Economy  (Third  Edition),  pp.  341-351.    Henry 

Holt  and  Company,  New  York,  1888. 

Chapter  VII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  v. 

Ely,   Hess,   Leith,  and   Carver.    Foundations   of   National   Prosperity, 

pp.  162-184. 
Seligman,  E.  R.  a.    Principles  of  Economics,  pp.  559-578. 
Tau.ssig,  F.  W.    Principles  of  Economics,  Vol.  II,  chap.  Ixiv,  pp.  419-440. 

Chapter  VIII 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  v. 
Carver,  T.  N.    Sociology  and  Social  Progress,  chap.  xxii. 
Carver,  T.  N.    Essays  in  Social  Justice,  chap.  iii. 

Clay,  Henry.   Economics  for  the  General  Reader,  pp.  418-442.   The  Mac- 
millan Company,  1918. 
Hadley,  A.  T.    Economics,  pp.  404-446. 

PART  TWO.    ECONOMIZING  LABOR 
Chapter  IX 

Cairnes,  J.  E.  Political  Economy,  pp.  57-69.  Harper  &  Brothers,  New  York, 

1874- 
Carver,  T.  N.    Principles  of  National  Economy,  chap.  x. 
Marshall,  Alfred.    Principles  of  Economics,  Book  IV,  chaps,  ix,  x. 
Smith,  Adam.   Wealth  of  Nations,  Book  I,  chaps,  i-iii,  pp.  4-19. 

Chapter  X 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xi. 

Chapter  XI 

Bullock,  C.  J.    Selected  Readings  in  Economics,  pp.  301-324. 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xii. 

Smith,  Adam.    Wealth  of  Nations,  Book  II,  chaps,  i,  ii,  pp.  241-250. 


400  ELEMENTARY  ECONOMICS 

Chapter  XII 

Ely,  Richard  T.    Outlines  of  Economics  (Third  Edition),  pp.  212-245. 

The  Macmillan  Company,  191 6. 
Ma^rshall,  Alfred.    Industry  and  Trade,  Book  II,  chaps,  viii-xii. 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  I,  chap,  iv,  pp.  48-66. 

Chapter  XIII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xv. 

Ely,  Richard  T.    Outlines  of  Economics,  pp.  596-622. 

Marshall,  Alfred.    Principles  of  Economics,  Book  IV,  chaps,  i,  ii. 

Chapter  XIV 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xvii. 
Marshall,  Alfred.   Industry  and  Trade,  Book  II,  chap.  i. 
Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  I,  chaps,  x- 
xiii,  pp.  155-198. 


PART  THREE.    THE  PRODUCTIVE  ACTIVITIES 

Chapter  XV 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  iv. 

Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  I,  chap,  ii, 

PP-  29-43- 
Smith,  Adam.   Wealth  of  Nations,  Book  III,  chap,  i,  pp.  336-340. 

Chapter  XVI 

Carver,  T.  N.   Principles  of  National  Economy,  chap,  xviii. 
Ely,   Hess,   Leith,  and   Carver.     Foundations   of   National   Prosperity, 
pp.  187-240. 

Chapter  XVII 

Bullock,  C.  J.    Selected  Readings  in  Economics,  pp.  73-103. 
Carver,  T.  N.    Principles  of  National  Economy,  chap.  xix. 
Ely,   Hess,   Leith,  and   Carver.     Foundations  of   National   Prosperity, 
pp.  19-26. 

Chapter  XVIII 

Bullock,  C.  J.    Selected  Readings  in  Economics,  pp.  155-192. 
Carver,  T.  N.   Principles  of  National  Economy,  chap.  xx. 

Chapter  XIX 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xxi. 
Ely,  Richard  T.   Outlines  of  Economics,  pp.  557-574- 
Seligman,  E.  R.  a.   Principles  of  Economics,  pp.  517-544. 


SUGGESTIONS  FOR  ADDITIONAL  READING     401 

Chapter  XX 

Carver,  T.  N.    Principles  of  National  Economy,  chaps,  xxii,  xxiii. 
Marshall,  Alfred.    Industry  and  Trade,  Book  II,  chaps,  vi,  vii. 
Mill,  John  Stuart.   Principles  of  Political  Economy,  Book  I,  chap,  iii, 
pp.  44-53. 


PART  FOUR.    EXCHANGE 
Chapter  XXI 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xxiv. 

Marshall,  Alfred.   Principles  of  Economics,  Book  V,  chap.  i. 

Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  III,  chap.  i. 

Chapter  XXII 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xxv. 
McCuLLOCH,  J.  R.    Principles  of  Political  Economy,  pp.  312-335. 
Marshall,  Alfred.    Principles  of  Economics,  Book  V,  chaps,  iii,  xv. 

Chapter  XXIII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xxvi. 
Marshall,  Alfred.    Principles  of  Economics,  Book  V,  chap.  viii. 

Chapter  XXIV 

Bullock,  C.  J.    Selected  Readings  in  Economics,  pp.  387-405. 
Carver,  T.  N.    Principles  of  National  Economy,  chap,  xxvii. 
Fisher,  Irving.   Elementary  Principles  of  Economics,  pp.  144-240. 

Chapter  XXV 

Carver,  T.  N.    Principles  of  National  Economy,  chap,  xxviii. 

Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  III,  chaps. 

xi,  xii. 
Taussig,  F.  W.   Principles  of  Economics,  Vol.  I,  pp.  354-387. 

Chapter  XXVI 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xxx. 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  I,  pp.  388-414. 
Walker,  F.  A.   Political  Economy,  pp.  171-186. 

Chapter  XXVII 

Cairnes,  J.  E.   Political  Economy,  pp.  353-374- 
Carver,  T.  N.    Principles  of  National  Economy,  chaps,  xxxi,  xxxii. 
Ricardo,  David.    Principles  of  Political  Economy  and  Taxation,  chap,  vil 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  I,  pp.  479-506. 


402  ELEMENTARY  ECONOMICS 

PART  FIVE.    DIVIDING  THE  PRODUCT  OF  INDUSTRY 

Chapter  XXVIII 

Ely,  Richard  T.   Outlines  of  Economics,  pp.  384-404. 
Smith,  Adam.    Wealth  of  Nations,  Book  I,  chap,  viii,  pp.  57-72. 
Taylor,  F.  M.    Principles  of  Economics,  pp.  166-178. 

Chapter  XXIX 

Carver,  T.  N.  Principles  of  National  Economy,  chap,  xxxiii. 
Malthus,  T.  R.  Principles  of  Population,  pp.  1-25,  514-535. 
Marshall,  Alfred.    Principles  of  Economics,  Book  VI,  chap,  i,  pp.  521- 

524,  and  chap.  ii. 
Taylor,  F.  M.    Principles  of  Economics,  pp.  95-130. 

Chapter  XXX 

Marshall,  Alfred.   Principles  of  Economics,  Book  VI,  chaps,  iv,  v. 
Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  II,  chap.  xi. 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  II,  pp.  131-152. 
Walker,  F.  A.    Political  Economy,  pp.  245-271. 

Chapter  XXXI 

Carver,  T.  N.    Distribution  of  Wealth,  chap.  iv.   The  Macmillan  Company, 

New  York,  1904. 
Marshall,  Alfred.   Principles  of  Economics,  Book  VI,  chap.  iii. 
RiCARDO,  David.    Principles  of  Political  Economy  and  Taxation,  chap.  v. 
Taussig,  F.  W.   Principles  of  Economics,  Vol.  II,  pp.  153-163. 

Chapter  XXXII 

Carver,  T.  N.  Principles  of  National  Economy,  chap,  xxxvi. 
Taussig,  F.  W.   Principles  of  Economics,  Vol.  II,  pp.  298-317. 

Chapter  XXXIII 

Carver,  T.  N.   Distribution  of  Wealth,  chap.  v. 
Marshall,  Alfred.   Principles  of  Economics,  Book  VI,  chap.  ix. 
RiCARDO,  David.    Principles  of  Political  Economy  and  Taxation,  chaps. 
ii,  iii. 

Chapter  XXXIV 

Carver,  T.  N.    Distribution  of  Wealth,  chap.  vi. 

Marshall,  Alfred.   Principles  of  Economics,  Book  VI,  chap.  vi. 

Chapter  XXXV 

Carver,  T.  N.  Principles  of  National  Economy,  chap,  xxxix. 
Marshall,  Alfred.    Principles  of  Economics,  Book  VI,  chap.  vi. 


SUGGESTIONS  FOR  ADDITIONAL  READING     403 

Chapter  XXXVI 

Carver,  T.  N.    Distribution  of  Wealth,  chap.  vii. 
Marshall,  Alfred.    Principles  of  Economics,  Book  VI,  chap.  vii. 
Taussig,  F.  W.    Principles  of  Economics,  Vol.  II,  pp.  164-198. 
Walker,  F.  A.    Political  Economy,  pp.  232-245. 

Chapter  XXXVII 

Carver,  T.  N.    Essays  in  Social  Justice,  chap.  xvii. 

Ely,  R.  T.    Outhnes  of  Economics,  pp.  643-735. 

Mill,  John  Stuart.    Principles  of  Economics,  Book  V,  chaps,  ii,  vi. 

Smith,  Adam.   Wealth  of  Nations,  Book  V,  chap,  ii,  pp.  298-389. 

PART  SIX.    THE  CONSUMPTION  OF  WEALTH 
Chapter  XXXVIII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xli. 

Ely,  R.  T.   Outlines  of  Economics,  pp.  132-148. 

M.\RSHALL,  Alfred.  Principles  of  Economics,  Book  III,  chap,  i,  pp.  84,  85. 

Chapter  XXXIX 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xlii. 

Ely,  Hess,    Leith,  and   Carver.    Foundations   of   National   Prosperity, 

PP-  356-359- 
Marsh.^ll,  Alfred.    Principles  of  Economics,  Book  III,  chaps,  ii,  v. 
W^ALKER,  F.  A.    Political  Economy,  pp.  314-328. 

Chapter  XL 

Carver,  T.  N.    Principles  of  National  Economy,  chap,  xliii. 
Walker,  F.  A.    Political  Economy,  pp.  305-314. 

Chapter  XLI 

Carver,  T.  N.   Principles  of  National  Economy,  chap.  xliv. 
Encyclop/Edia  Britannica.   Article  on  "  Sumptuary  Laws." 

Chapter  XLII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  xlv. 
Marshall,  Alfred.    Principles  of  Economics,  Book  VI,  chap.  xiii. 
Taussig,  F.  W.   Principles  of  Economics,  Vol.  II,  pp.  225-252. 

PART  SEVEN.    REFORM 
Chapter  XLIII 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  lii. 
Hinds,  W.  A.    American  Communities.    C.  H.  Kerr  &  Co.,  1908. 
Pasvolsky,  Leo.   The  Economics  of  Communism.    The  Macmillan  Com- 
pany, 192 1. 


404  ELEMENTARY  ECONOMICS 

Chapter  XLIV 

Carver,  T.  N.    Essays  in  Social  Justice,  chap.  ix. 

Le  Rossignol,  J.  E.    What  is  Socialism?   T.  Y.  Crowell  &  Co.,  New  York, 

1921. 
Mill,  John  Stuart.    Principles  of  Political  Economy,  Book  V,  chap.  xi. 

Chapter  XLV 

Carver,  T.  N.    Essays  in  Social  Justice,  chap.  xi. 

FiLLEBROWN,  C.  B.  The  A  B  C  of  Taxation.  Doubleday,  Page  &  Com- 
pany, New  York,  1909. 

George,  Henry.  Progress  and  Poverty.  D.  Appleton  &  Company,  New 
York,  1880. 

Chapter  XL VI 

Carver,  T.  N.    Principles  of  National  Economy,  chap.  liii. 
Eltzbacher,  Paul.    Anarchism.    Translated  by  Steven  T.  Byington.    B.  R. 
Tucker,  New  York,  1908. 

Chapter  XL VII 

Carver,  T.  N.    Essays  in  Social  Justice,  chap.  x. 
Taylor,  F.  M.    Principles  of  Economics,  pp.  325-365. 


INDEX 


Agricultural  credit,  232 
Agriculture,  why  it  is  losing  ground, 

148 
Anarchism,  380 

Balance  of  the  factors  of  production, 

117 
Balanced  population,  119 
Bank  notes,  230 
Business,  organization  of,  100 

Capital,  meaning  of,  91 ;  productivity 
of,  99 

Capitalist,  function  of,  96 

Civilized  man,  economic  character- 
istics of,  129 

Communism,  353 

Competition,  what  it  is,  39 

Confidence  and  economy,  53 

Conflict  of  interests,  58 

Consumption  of  wealth,  319;  ra- 
tional, 325;  control  of,  340 

Cooperation,  meaning  of,  45;  where 
successful,  46;  voluntary  versus 
compulsory,  49 

Cooperative  society,  the,  107 

Corporation,  the,  loi 

Crises,  commercial,  235 

Demand  and  supply,  basis  of,  203 
Depressions,  industrial,  236 
Diminishing  returns  from  land,  146 
Division  of  labor,  75 

Economic  goods,  what  they  are,  8 

Economize,  what  the  word  means,  4 ; 
why  we  must,  s ;  three  ways  to,  6 

Economy,  meaning  and  importance 
of,  4 

Extractive  industries,  132 ;  instabil- 
ity of,  142 

Federal  Farm  Loan  system,  232 
Federal  Reserve  system,  230 
Fish  culture,  153 


Fishing,  134 
Forestry,  153 

Genetic  industries,  143 
Geographical     advantages     of     the 

United  States,  19 
Geographical  situation,  favorable,  16 
Getting  a  living,  ways  of,  125 
Government,  share  of,  in  distribu- 
tion, 306 

Hunting,  132 

Intensive  farming,  114 

Interest,  meaning  of,  290;  why  paid, 

291;    and    the   supply   of  capital, 

296;  law  of,  299 
Investing,  or  buying  producers'  goods 

instead  of  consumers'  goods,  95 

Land,  fertility  of,  in 
Large-scale  production,  162 
Law,  need  for,  51 
Leisure  class,  64 
Liberalism,  constructive,  387 
Limited  liability,  102 
Location  value  of  land,  112 
Lumbering,  136 
Luxury,  68,  322 

Man,  value  of  a,  322 
Manufacturing  industries,  159 
Margin  of  cultivation,  284 
Marginal  utility,  199 
Market,  first  law  of,  201 
Merchandising,  182 
Mining,  140 
Money,  use  of,  215;  kinds  of,  in  the 

United   States.  218 
Monopolizing,  186 

Partnership,  100 
Pasturage,  135 

Poverty,  program  for  abolition   of, 
395 


40s 


4o6 


ELEMENTARY  ECONOMICS 


Power,  sources  of,  90 
Production,  primary  factors  of,  3 
Professional  service,  188 
Profits,  meaning  of,  301 
Prosperity,  basis  of,  3 

Race   of   men,    characteristics    of    a 

capable,  29 
Railway  development  of  the  United 

States,  174 
Rent,  definition  of,  283 ;  why  paid, 

283 ;  law  of,  288 
Revenues,    public,    classification    of, 

306 
Risk,  necessity  of,  302 ;  irksomeness 

of,  203 

Saving,  cost  of,  300 

Scarcity,  meaning  of,  203 

Single  tax,  372 

Socialism,  363 

Standardization,  186;  and  economy, 

54 
Standards  of  living,  346 
Steam  engine,  88 
Storing  goods,  184 


Struggling  for  existence,  methods  of, 

40 
Sumptuary  legislation,  341 

Tax,  meaning  of,  307 

Taxation,  canons  of,  314 

Tillage,  144 

Transportation,  170 

Thrift,  and  accumulation,  66;  as  re- 
lated to  the  value  of  a  man,  327; 
as  related  to  progress,  321;  in 
times  of  crisis,  336 

Trust,  the,  106 

Utility,  relation  of,  to  value,  196; 
marginal,  199 

Value,  its  meaning,  193;  its  cause, 
199;  present  and  future,  297;  why 
a  thing  has,  15 

Waiting,  irksomeness  of,  296 

Waste  of  man  power,  62 

Wealth,   two   meanings   of,   8 ;   how 

measured,  92 
Well-being,  relation  of,  to  wealth,  9 


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